On March 14, 2012 I was reading the news headlines, while eating my lunch, when notice that one of them stated that 4 big banks failed the stress test administered by the Federal Reserve Bank. So what does that mean to me as a consumer and an entrepreneur?
First let’s define what a stress test really is. Stress testing is simply analyzing a financial institution under various “what-if” scenarios. The scenarios could involve anything from sharp increases in unemployment rates, interest rates, and oil prices to market crashes and reduced domestic production. It supposed to be better than forecasting and is widely used in Europe and by the International Monetary Fund (the world’s bank). According to Wikipedia, “Stress testing reveals how well a portfolio is positioned in the event forecasts prove true. Stress testing also lends insight into a portfolio's vulnerabilities. Though extreme events are never certain, studying their performance implications strengthens understanding.” In layman’s terms, a stress test shows how a financial institution will manage if the economy crashed (again) or if the world came to an end.
With the information above, now I can fully understand Jonathan Stempel’s article Fed gives high marks in bank stress tests results , right?
To quickly summarize, larger banks passed (15 out of 19 to be exact), while others failed. This means that 15 banks would survive extreme economic changes through 2013 if the changes occurred this year. JP Morgan Chase, Wells Fargo, and PNC were among the banks to receive a gold star. But the named financial institutions that failed are what are so intriguing. Citigroup, MetLife, Ally Financial, and SunTrust Bank all failed, miserably.
It really surprises me that MetLife and Ally Financial failed. According to the article, MetLife is the largest life insurer in the US. Ally Financial was the leading online bank, then switch gears to the consumer loan market when it purchased GMAC Finance. To think, Snoopy (MetLife’s mascot) would have a foreclosure sign on his dog house. And the auto industry was bailed out only to be financed by irresponsible CEOs and investors. However, I am not all surprised that Citigroup failed. If you asked me, it was in their destiny.
I have done business with Citigroup, and I will never do business with them again. Since 2009, Citigroup, better known as Citibank, made various business decisions that I was skeptical of. One of those decisions impacted me on a personal level and I am still dealing with the consequences of Citigroup’s actions until this day. I even owed stock in the company, but not anymore. In October 2011, 24 consumers were arrested for attempting to close their bank accounts at Citibank in New York during Occupy Wall Street protest. Click this link for additional information about this incident. I truly believe that if the customers were wearing business suits that NYPD would not have been involved.
So what does the stress test results mean to the rest of the U.S.? It means that 79% of the financial institutions tested are doing what we, as consumers, expect them to: protect our funds, offer competitive interest rates, and not issue risky assets (loans). It also means if you have any connections to the four failures listed above you may want to end those relationships. Obviously, they need to be monitored. Those 15 banks are considered to beacons of light in the muddy waters of this economy. And the stock prices of these banks have increased and probably will continue to do so. The world’s stock markets ended on a high note. So I guess majority of our banks passing a test means, that we can take a collective sigh of relief. Citibank, technically, did not fail the stress test. The Federal Reserve Bank merely did not approve the capital plan, or their explanation of where the money actually goes. My point: Citibank is a failure.
"Putting My Money Where My Mouth Is" is a journal about real life experiences and concerns of Jéneen R. Perkins. The purpose of the blog is to exhibit the real life challenges and answer the tough questions posed by the concepts of business, entrepreneurship and money.