Today the Federal Reserve of the United States released a widely anticipated report which has shown that the current recession and wild market fluctuations have “substantially reduced” the fiscal reserves at some of the largest banks currently in operations. However, the report has shown that most firms still hold excess reserves in accordance with the previous regulatory standards.
This report is intended to restore the publics (and the global audience) confidence that the largest of banking institutions in the United States are stable. The stress tests were done on 19 banking institutions in the United States with methods used to determine the strength of the banks portfolios by simulating two different scenarios with the final results being released in ten days, on the fourth of May.
The report stated that the 19 banks that had the tests performed hold approximately two thirds of the assets and over one half of the loans for the US Banking system. The regulators who participated in the tests calculated off-balance sheet capital buffers that the banks intend to incorporate in 2010 due to proposed changes in accounting rules. As a result of the changing regulations, banks intend to add approximately $900 billion to their balance sheets while also raising risk assets by nearly $700 billion.
The government ordered the plan as weakening economic data forced forecasters to downgrade their outlook for 2009 as mounting job losses and stifled growth remains uncontained. Economists are predicting the US economy to contract by 2.5% with an 8.9% unemployment rate. Presently, the unemployment rate stands at 8.5% and GDP (gross domestic product) has contracted for the past three quarters.
Regulators who performed the tests sought to keep financial institutions lending over the coming two years and also determined the amount of capital they may need during a prolonged and/or worsening economic slump. The amount of capital each institution holds will forecast the company’s ability to retain earnings over the course of the coming two years, including access to private capital in the future as well as the ability to cover future drawdowns on capital.
“The bank tests have shown that a majority of those tested remain solvent and viable over the medium to long term”, stated TheLFB-Forex.com Trade Team members. “Meanwhile, taxpayers ultimately will still provide relief to those institutions deemed worthy under the Federal Reserve’s Troubled Asset Relief Program in order to increase their financial buffer.”
Treasury Secretary Geithner is gearing up to inform finance chiefs of the G7 (Financial Leaders from seven industrialized nations) that the U.S. consumer cannot be relied upon spur global economic expansion. Secretary Geithner is also expected to delve into further details regarding the stability of the United States financial system while pushing leaders to focus on a recovery plan which is not shoulder by U.S. consumers.
However, it is important to note that there are signs that the crisis that has been seen around the world may be slowing. “Economic data which has been released during the past six weeks has suggested a bottom may be coming into place” stated TheLFB-Forex.com Trade Team members. “If so, and it turns out to be a light at the end of the tunnel that is not an oncoming train, the equity market may bounce, commodities will move higher, and the Federal Reserve will finally get its wish of a reduction in the value of the dollar. Lower interest rates are being banked upon to spur inflation and therefore confirm growth, and that cycle really gets started in earnest with the dollar index breaking 80.00 support” the Trade Team said.