Banking Law

Does Your Bank Meet the Stress Test?

By Margaret Jasper, Attorney
 
  • Update: Banking industry shows signs of recovery, with new lending activity on the horizon
  • Strong banks are an essential component of a successful economy
  • The bank stress test evaluates the financial well-being of the nation's banks
  • Your deposit accounts are protected in an FDIC-insured bank up to $250,000
  • Continue to make your loan and credit card payments even if your bank fails

 

Update

The banking industry shows signs of recovery, even though the FDIC expects there will be more failed banks in 2010 than in 2009. What all the data means for bank customers is increased profits and lower required reserves for banks, priming the pump for new lending.

An August 2010 FDIC report highlights recent activity in the banking industry, and what it means for the economy. Banks facing failure in 2010 tend to be smaller, following the path of the recession, which hit large institutions first. The assets of problem banks in 2010 are less than the assets of problem banks in 2009 - another good sign.

Fewer past-due loans and loan losses were driving higher bank profits halfway through 2010. The FDIC also reported its insurance funds can cover expected losses. If signs and profits stay positive, increased lending should follow.

Original Article

During these difficult economic times, everyone's feeling the stress of meeting their financial obligations, including our nation's banks. Strong banks are an essential component of a successful economy, which has led the Federal Reserve to devise a "bank stress test." This tests the financial strength of our banks and determines whether a particular bank will stay afloat or fail. This program is known as the Supervisory Capital Assessment Program (SCAP).

Under SCAP, federal banking supervisors carry out examinations of banks and investment houses' capital to determine how much more money they may need to withstand any additional weakening of the economy.

Capital is the value of the bank's assets minus its liabilities. In other words, the test asks whether the bank can pay its bills and still have enough money left over to operate - give consumers loans, back savings accounts and other day-to-day transactions.

Preliminary Bank Stress Test Results

Initial findings of 19 of the largest US were released on May 7, 2009. These companies are unlikely to need additional funds:1

  • J.P. Morgan Chase & Co.
  • Goldman Sachs Group Inc.
  • MetLife Inc.
  • American Express Co.
  • Bank of New York Mellon Corp.
  • BB&T Corp.
  • Capital One Financial Corp.
  • U.S. Bancorp
  • State Street Corp.

However, these banks will need to raise more money to keep in their reserves. They have until June 8, 2009, to show how they expect to find the additional funds:

  • Bank of America Corp.
  • Wells Fargo & Co.
  • GMAC LLC
  • Citigroup Inc.
  • Morgan Stanley
  • Fifth Third Bancorp
  • KeyCorp
  • PNC Financial Services
  • Regions Financial Corp.
  • SunTrust Banks Inc.

What if Your Bank Fails the Stress Test?

If your bank fails the stress test, it doesn't necessarily mean the bank will close its doors. It means that the bank needs more capital to survive. The bank must make a plan to raise additional capital within 90 days. The plan must be approved by the bank supervisors and set up within six months. If the bank can't raise the capital itself, it can ask for government help to stay afloat during difficult these financial times.

FDIC-Insured Banks

You may wonder what happens if your bank is on the list needing more capital. As long as your bank is insured by the Federal Deposit Insurance Company (FDIC), you don't have to worry about losing your money as long as the total of your individual deposit accounts in one bank doesn't go over $250,000.

The FDIC guarantees account balances up to $250,000 per person even if your bank closes its doors for good. This includes your checking, savings and money market accounts, and certificates of deposit (CD). Joint accounts are insured for $250,000 per co-owner of the account for a total coverage of $500,000.

FDIC insurance doesn't cover accounts such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities. These may be protected by other agencies, though.

Most banks are covered by FDIC insurance. You can find out if your bank is FDIC-insured and obtain further information about FDIC insurance coverage on the FDIC Web site or going to your bank and asking. There's usually a sign saying your bank is protected.

Continue Paying Loan and Credit Card Payments

Even if your bank is on the list that needs to raise more funds, continue making your payments. You can't get out of paying what you owe even if the bank closes its doors.

Another lender - bank or other company - will take over the failed bank's loans and credit card accounts and you still must pay your debts. Stop paying on time and you risk damaging your credit and placing your accounts with collection agencies.

Oversight and Transparency

No one knows exactly what the future brings, but you can expect more oversight about how the money from the Troubled Asset Relief Program (TARP) is spent.

Elizabeth Warren, chair of the Congressional Oversight Pane that monitors the funds used to back the troubled economy is dedicated to keeping the public informed. She recently stated that, "if we don't keep the American people as part of the conversation, the decisions that will get made, will not be the decisions that are best for them. And that's what matters."2

Sources

1 Bank Stress Test Results, Moneymorning.com, May 8, 2009, accessed May 29, 2009, http://www.moneymorning.com/2009/05/08/bank-stress-test-results-4/
2 Will Government Pass Its Own Stress Test, No Quarter, May 17, 2009, accessed May 29, 2009, http://www.noquarterusa.net/blog/2009/04/17/will-government-pass-its-own-stress-test/

Questions for Your Attorney

  • If my bank was in trouble and my loan accounts have been taken over by another lender, what kind of notices should I expect to receive - how do I know if a notice is legitimate?
  • How will lending be affected at banks that need more reserves? Will their loan products be more expensive than those offered by banks in better financial condition?
  • Can you review my estate plan and retirement accounts to make sure everything is protected by FDIC coverage?

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