Despite big headlines in today's newspapers, bank customers shouldn't get stressed out over bank stress tests.
If you're not sure what I'm talking about, the Federal Reserve yesterday announced the results of a study to determine whether the country's largest bank holding companies could survive a major recession if it happened today. Out of 19 institutions tested, 15 passed, including JPMorgan Chase, Wells Fargo, Bank of Ameria and Morgan Stanley, but four big names in the financial industry didn't: Citigroup, SunTrust, Ally Financial and Metlife.
If you have a checking account, savings account, or other deposits at one of the banks that didn't pass the test, there's no need to be alarmed, for a couple of reasons:
- The economic scenario the Fed tested those banks against was really, really bad. We're talking unemployment at 13 percent, 50 percent drop in the value of the stock market, 21 percent decline in housing prices. Even during the worst of the most recent financial crisis, unemployment peaked at 10.2 percent, so with a sluggish but reasonably firm recovery under way, the odds of the economy dipping that far in the near future are fairly low.
- All bank deposits at the institutions that failed the test are backed by the full faith and credit of the U.S. government up to $250,000, thanks to FDIC insurance, so even if that nightmare scenario did occur, your deposits would be protected.
That's not to say the tests aren't important. To prevent another bank bailout, banks need to be well-capitalized enough to cover their own losses should we face an unexpectedly deep economic downturn. The fact that the Federal Reserve is holding them accountable is a good thing for taxpayers, who shouldn't be stuck with the bill the next time a bunch of bank bets go bad.
But this news is actually more important for investors in bank stocks than it is for those banks' depositors. That's because the Federal Reserve is unlikely to allow banks that can't pass the stress test to pay dividends to investors, so owners of Citigroup stock are actually the ones who should be concerned here.
If you're still worried about your bank's financial stability, you can always check out Bankrate's Safe & Sound star ratings, which rates banks according to their overall financial soundness.
What do you think? Would you be worried if your bank failed a stress test?
Follow me on Twitter: @ClaesBell.