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Will your bank pass its stress test?

By Claes Bell · Bankrate.com
Friday, November 16, 2012
Posted: 4 pm ET

The Federal Reserve released more details this week about the stress tests it plans to conduct on 19 of the largest banks companies in the country. There aren't any treadmills and ECG monitors involved in these types of stress tests. The Fed will analyze how the banks' balance sheets would fare in a truly terrible economic downturn.

Here are some of the dire economic conditions banks will be tested against:

  • 12.1 percent unemployment.
  • -4.7 percent gross domestic product growth.
  • A more than 40 percent drop in the Dow Jones industrial average, to 7,269.1. (It's 12,511.36 as I write this.)
  • A roughly 20 percent drop in housing prices from today's already pretty depressed levels.

The stress tests are called for under the Dodd-Frank financial reform law, the idea being that if banks are capable of surviving an economic downturn of the magnitude described above, we should avoid a repeat of the $1 trillion bank bailout that took place during the financial crisis.

It will be interesting to see how the banks perform in these  stress tests. In the last test, some bank holding companies, including SunTrust, Ally Financial and Citigroup, ran into trouble, so the Fed will likely be watching closely to see if they have fortified their balance sheets since the last test.

For bank customers, a failed stress test isn't a huge deal. Consumer deposits are backed by the Federal Deposit Insurance Corp. up to $250,000 per account holder. That said, if you have more than $250,000 in an account at one of these banks or you just don't like the idea of being with a bank that's not adequately recession-proofed, it might be worth keeping an eye on the results, which should be completed by March 2013.

If you're interested in checking out the financial health of the bank you're with now, Bankrate's Safe & Sound Star Ratings collect information on the financial strength of banks all over the country.

Have you checked your bank lately? Would you change banks if yours failed its stress test?

Follow me on Twitter: @ClaesBell

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