Federal Reserve to Begin New Round of Bank Stress Tests

In a couple of weeks, the U.S. Federal Reserve will begin a new round of stress tests on America's largest banking organizations, a top Federal Reserve official said Friday, warning that strains from the European debt crisis could pose significant downside risks to the U.S. economic outlook.

The stress tests are mandated by the Dodd-Frank Act, which was signed into law in the summer of 2010, to "evaluate the ability of these firms to withstand worse-than-expected outcomes for the economy," Fed Vice Chair Janet L. Yellen said in remarks prepared for delivery to a conference on the role of central banks in financial stability, sponsored by the Federal Reserve Bank of Chicago and European Central Bank.

U.S. banking institutions have "manageable" levels of direct exposure to the peripheral European countries, but more substantial links to financial institutions in the larger European economies with "banks facing significant funding pressures," Yellen said.

"In light of such international linkages, further intensification of financial disruptions in Europe could lead to a deterioration of financial conditions in the United States," she added. "We are monitoring European developments very closely, and we will continue to do all that we can to mitigate the consequence of any adverse developments abroad on the U.S. financial system."