American Banks are stressed-Part VIII

This is the eighth and concluding article on the stress tests carried out on the top nineteen FIs in the U.S. recently, to determine their need for additional capital.

In the previous article, we had seen how the supervisory authorities examined and evaluated the data obtained from the nineteen FIs, and came up with their assessments, about the strengths and weaknesses of these institutions.   The data submitted by the concerned institutions was subjected to minute scrutiny, and cross checked with supporting documents, information, etc., to satisfy themselves of the authenticity of the same.   In certain cases, additional data was also called for to double check and confirm the initial submissions.

The above tests enabled the supervisors to determine the level of buffer capital required by the concerned FIs, given their ability to stave off the adverse effects of the economic crisis, in both the baseline, as well as the more adverse scenarios.   The buffer capital was intended to absorb any unexpected losses likely to be suffered by the FIs, in future, especially in the year 2011.   The quantum of such buffer capital would be sufficient to overcome the amount of expected losses in future.

After putting the FIs through the grind, if any of them were found wanting, that is, in need of more capital, especially with reference to common equity, then such institutions were expected to arrange for such enhanced capital on their own, or alternatively to accept assistance of the U.S. Treasury, through the Capital Assistance Program.   That would enable the FIs or BHCs to remain at the forefront of financial intermediation, in existing, as well as, more challenging situations and environments.

Conclusion:  That it is difficult to predict the future, is a given.   However, the SCAP has addressed the issue of strengthening the American financial system to face up to the existing and future challenges.   The methodology adopted for this purpose is quite comprehensive, and takes into account all possible developments in the economic sphere, and their effects on the financial system.

Each component of the scenarios was examined individually, and also as a whole.   Similar treatment was given to the projections, forecasts, etc of the BHCs in relation to their expected results, based on the revenue streams, expenditures, etc.   Where the supervisors were not satisfied with the quality of the data submitted, they called for additional data in support of the earlier one.  

The framework of the stress tests was designed in such a way as to bring out the pluses and minuses of the financial standing of the BHCs, into the open, and allow the supervisors to suggest, and initiate where necessary, suitable steps to improve the inherent strengths of the BHCs.

On balance, it may be said, that the supervisors have done a good job, under the circumstances, reducing the element of chance in their job, to the minimum.   But, as with any prediction, or hypothesis, an element of uncertainty is unavoidable, and only time will tell how far the above exercise of stress tests would serve the purpose for which they are intended.

                                                                                                     Concluded.