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Is The Fed Telegraphing Stress Test Results?

Tyler Durden's picture




 

On the Federal Reserve's web site there is a useful search feature (link here) that provides a listing of all "Enforcement Actions" the Fed has brought against bank holding company subsidiaries, after these have failed a bank exam or need to take further action in the Fed's opinion. In essence the Fed has been running micro stress tests for 2 decades: the Fed database goes back all the way to 1989.

Going through the list the first obvious thing is that the 39 enforcement actions already submitted in the first 3 months of 2009 surpass 2007's entire 34 and 2006's 28. Also, reading the enforcement letters indicates that the Fed's key concerns relate to capital (or the wasting thereof) and usually prohibit dividends, debt buybacks and require bank holding companies to come up with quick capital replenishment plans. Failure to comply with an action puts officers and directors personally at risk.

The list of the 5 most recent banks singled out for enforcement violations are:

  • United Security Bancshares, Inc., Woodstock, Georgia
  • Blossman Bancshares, Inc., Lacombe, Louisiana
  • Heritage Bank, Topeka, Kansas
  • Community Bankshares, Inc., Greenwood Village, Colorado; Community Banks of Colorado, Greenwood Village, Colorado
  • BankEast Corporation, Knoxville, Tennessee; BankEast, Knoxville, Tennessee

This list indicates that the Federal Reserve is already far ahead on the stress test curve, while the frequency of new Enforcement Actions can not possibly spark confidence in anyone who is overly optimistic for a favorable outcome of the Stress Test at the systemic level and could also be the reason for focusing on only the $100 billion+ sized banks, as the pain at the smaller banks can already be accessed using the service and is pervasive.

 

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