Can we stand another financial meltdown?

23 11 2011

The Federal Reserve is having America’s largest banks go through a new round of Stress Testing to see if they would be able to endure financial meltdown like what we experienced in 2008. Stress Testing helps determine the stability of a given entity, in this case, financial institution.

Who is required to participate? The central bank ordered the top 31 U.S. banks, with assets of $50 billion or more.

According to CNN, “Six banks with large trading operations will have an even higher hurdle to clear, simulating a more severe global financial meltdown. Those banks are Bank of America, Sachs, Citigroup, JPMorgan Chase, Morgan Stanley and Wells Fargo.”

Hopefully the Financial Institutions will be able to provide realistic and credible plans showing they can maintain sufficient capital. This way even in the event of a crisis, they can continue to do business.

What is sufficient capital? The Banks will need to display that they can maintain at least 5% of the capital as a buffer.

What happens if a Financial Institution fails the Stress Test? They may not be allowed to distribute dividends. The plans are due to the Fed on Jan. 9, 2012. The Fed said it will release some of the results to the public, hopefully they will indicate thorough preparation from the financial institutions being tested.

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