Stress Test: Put into Context

 Before the financial crisis of 2008 was over, both the U.S. government and the financial services industry had leapt into action to create both immediate and long-term strategies for strengthening both industry participants and the regulatory framework. These took the form of TARP, BASEL’s new capital requirements, the Dodd-Frank Act, and the stress tests of 2009.  

In November of 2011, the federal banking regulators asked  31 large U.S. banks  to conduct a new stress test.   Soon the regulators will announce the results of those tests.   The purpose of the stress tests has been viewed in many conflicting ways, so let’s talk about what the stress test is all about.

The stress test is designed to study the impact of an  extreme  economic downturn on the capital levels the largest banks. In other words, if a doomsday economic scenario ever occured, would banks still have sufficient capital to meet supervisory standards? It is the most aggressive stress test ever issued by the Fed, (much more severe than the 2009 stress test scenario). The Federal Reserve has stated that the stress tests are neither a forecast nor a projection for the U.S. economy, nor do they take into account any actions a bank could take to mitigate the impact of a real crisis.  

The stress tests are not a reflection of the current solvency of any particular bank. The Fed’s hypothetical economic scenario itself is highly, highly unlikely. You can read more about the severity of “adverse scenario” here. The stress tests ask banks to assume unemployment of  13%.  In fact, the unemployment rate has never gone over 11% (let alone reach 13%) since the Great Depression.  The stress test assumes the Dow drops to 5,700.  In fact, the lowest quarterly Dow close during the most recent recession was  8, 113.14 (during the first quarter of 2009). The stress tests also ask banks to assume the GDP growth drops to negative 8%.  In fact, GDP has dropped by 8% or more only two times since 1947: Q4 2008 (-8.9%) and Q1 1958 (-10.4%).

The reality is that if the Fed’s hypothetical “adverse scenario” ever occurred, it would be catastrophic across the majority of all industries.  According to Moody’s Analytics, if the scenario were to come true; 4.5 million additional jobs would be lost by the end of 2012; national debt will increase by an additional $1 trillion by mid-2013; and retail sales would be down 10% by the end of 2012.  In particular car sales would drop off by 5 million (33% lower than projected sales) – creating serious trouble for GM & Ford. 

The good news it that U.S. banks currently have $1.5 trillion in capital, the highest capital-ratio levels in history, according to FDIC data.   Capital ratios of large U.S. banking organizations have risen well about supervisory benchmarks.  So while banks might not make it through a doomsday without a capital hit, they are expected to perform well given the scenario. 

Moreover, banks are stronger than even pre-crisis. The risky lending practices have ended, compensation incentives have been overhauled, and the concept of too big to fail is gone.  Insurers have remained solvent throughout a decade that saw a record number of natural catastrophes. Banks have stronger balance sheets, and bank repayment of the TARP investments is on course to deliver over $21 billion in profit to taxpayers.

You can read more about the current health of the financial system in the recently released Hamilton Financial Index.

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The Hamilton Financial Index: Panel Discussion

Last week, The Partnership for a Secure Financial Future hosted a panel discussion to reveal the results of the Hamilton Financial Index, a semi-annual report on the state of the financial services industry, and the value it provides to the economy during the crisis and the ongoing recovery. Watch below for a discussion with the author and candid conversation from the audience. Learn more at www.OurFinancialFuture.com.

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Treasury Secretary: the U.S. Financial System is Significantly Stronger Since the Crisis

In remarks made yesterday afternoon, Treasury Secretary Tim Geithner said the U.S. financial system is getting stronger, and is now significantly stronger than it was before the crisis.

This is consistent with a report that the Roundtable released earlier this week.

Monumental changes have occurred since the financial crisis. Some of these changes have been government imposed, through the Dodd-Frank Act. But, a host of changes have happened on behalf of the companies themselves. And with 70% of the rules from Dodd-Frank having not yet gone into effect, as well as the Basel III capital standards, this is indeed progress.

Executive compensation has been reformed significantly to align with long-term performance. Banks are at the highest capital levels in the history of American banking. TARP will be repaid with $21 billion in profit to taxpayers.

Geithner said, “The stronger position of banks is helping to support broader economic growth, including the more than 3 million private sector jobs created over 22 straight months, and the 30 percent increase in private investment in equipment and software. Broadly, the cost of credit has fallen significantly since late 2008 and early 2009. Banks are lending more, with commercial and industrial loans to businesses up by an annual rate of more than 10 percent over the past six months.

 As the Secretary remarked, there is hard work ahead. We are not out of the woods yet. But, consumers and small business owners should be confident as we move forward that we are well on our way.

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Job Growth and the Financial Services Industry

During his State of the Union speech the President said, ‘In the last 22 months, businesses have created more than three million jobs. Last year, they created the most jobs since 2005.’ All of those jobs were made possible by the backing of America’s financial services industry. Despite any rhetoric to the contrary, the facts are that America’s financial institutions share an interdependent relationship with the same businesses that are creating new jobs for America’s recovery.

Job creation doesn’t happen in a vacuum. As the President said, manufacturing jobs have increased, but so has commercial and industrial lending, which just went up $44.8 billion in the third quarter of 2011 — the fifth straight quarter such lending balances have risen.

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2012 Off to Good Start with Strong Lending Results

This week both Citi and JPMorgan Chase announced strong results for small business lending in 2011.

Chase’s announcement of a 52% increase year-over-year for small business lending was staggering, with a total of $17 billion lent to American small businesses in 2011. Citi also announced a 30% increase in small business lending for 2011 with $7.9 billion in small business loans extended.

Financial services companies across the country contribute to the success of small businesses in many ways from extending loans, to offering financial education.

For more news on small business lending, please visit a new website brought to you by the Partnership for a Secure Financial Future, www.OurFinancialFuture.com.

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BITS and FS-ISAC Launch Service to Reduce Email Fraud

BITS, the technology policy division of The Financial Services Roundtable, and the Financial Services Information Sharing and Analysis Center (FS-ISAC) are offering financial institutions a new service to prevent email fraud and phishing attacks through enhanced threat intelligence.

The Trusted Email Registry, available at no cost to BITS/Roundtable and FS-ISAC member companies, collects information about email traffic from Internet Service Providers (ISPs) and provides domain-specific reports to institutions. With this intelligence, companies can see attempts to send fraudulent emails purporting to originate from their system and take measures to stop them, preventing fake emails from ever reaching their customers.

Criminals “phish” accounts by sending emails that appear to come from a legitimate financial institution asking the recipient for account information or to click a link that then downloads malicious code designed to steal information.

“By providing an information link between institutions and ISPs, the Registry allows financial services companies to safeguard their email channel more effectively. By decreasing the chance a customer will receive unauthorized email, institutions expect to reduce fraud,” said BITS President Paul Smocer.

Member institutions access the Registry through www.bits.org or www.fsisac.com and choose Agari or Return Path, both industry leaders in email authentication deployment and data analysis, to facilitate the information retrieval.

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Business Lending Up 8% for 2011

As we begin 2012, there are signs that the economy is growing. New construction of apartment buildings and supermarkets can be seen around town. Signs for hire are posted in storefront windows. But it is business lending in particular, that is showing signs of significant and sustained growth.

Business lending is up 8% year over year, a $100 billion increase. The Federal Reserve reports that commercial banks had $1.34 trillion in loans extended to businesses of all sizes at the close of 2011. At the close of 2010, $1.24 trillion business loans were outstanding. According the FDIC’s Quarterly Banking Profile for the Third Quarter of 2011, business lending has increased consecutively for the last five quarters.

This news follows the heels of a recent report , showing that over $600 billion of small business loans were outstanding in 2011, and the largest banks had committed an additional $100 billion over the next three years.

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Let’s Go:The CFPB and Financial Services Companies

 Last week, the Consumer Federation of America, one of the most effective and respected consumer organizations in the country, hosted a conference in Washington, DC.  I was honored when CFA invited me to speak at the conference because while we may not agree on all the details, The Financial Services Roundtable and its members are committed to treating consumers fairly  and to delivering value to their customers every day.

The panel in which I participated was asked the question: “what should the Consumer Financial Protection Bureau’s (CFPB) priorities be?”

I offered four suggestions:

1.  Plain Language.  Nothing tears down the walls of misunderstanding and confusion faster than plain language, consumer financial disclosures, and agreements.  Already, the CFPB has made significant progress toward this goal in developing several iterations of plain language mortgage disclosures and field testing those disclosures.  We wholeheartedly support this work.  Complicated disclosures have long been a thorn in the side of industry as well as consumers. I urge CFPB to issue plain language disclosures for mortgages and all other consumer financial services products.

2. Stop the Fraudsters. I urge the CFPB to make stopping financial fraud a priority. Every day, ruthless fraudsters are hard at work tricking consumers out of their money and their peace of mind with schemes that run the gamut from foreclosure prevention to get rich quick and getting out of debt. These criminals who increasingly operate in the dark corners of the Internet must be rooted out and put behind bars.  The CFPB should partner with the banking regulators and other Federal and state regulators and law enforcement to put financial fraudsters out of business.

3. Lead with Regulation and Supervision. CFPB has the opportunity to build a new agency infused with the best of “what worked” at its predecessors. Experience shows that robust stakeholder input, combined with rulemaking under the Administrative Procedure Act and thoughtful supervision produces quality results for consumers and financial services companies. There’s no question that enforcement is a vital tool, but enforcement simply isn’t as effective as regulation and supervision in achieving compliance with consumer financial services law.

Achieving the right balance will require judgment and leadership at every level at the new agency.

4. Financial Literacy: There’s an App for That.  Financial literacy is a little like the weather; everyone talks about it, creates materials, and holds classes, but we still have the equivalent of blizzards – millions of Americans who do not know how to manage their money. The CFPB is uniquely qualified to take financial literacy to a whole new level.  A 21st century agency staffed with some of the most tech-savvy and consumer-focused people around, the CFPB should develop new ways to envision and deliver financial literacy, and do what Apple did, make people want to engage, make it easy, and available at every appropriate intersection.

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Have a Safe Holiday Season Online

Nine million shoppers logged in Cyber Monday to contribute to the biggest online spending day in history. Online sales hit a new one-day high of $1.028 billion, an increase of 15.9% over last year, according to comScore Inc. data.

Since 2005, Cyber Monday purchases have grown more than 40 percent showing that more and more of us are choosing online deals and that shopping from our homes and mobile devices is easy, convenient and practical. But is it safe?

“Whenever consumers engage in any online financial transaction, they need to be conscious of the security risks and protect their digital presence,” according to Paul Smocer, president of BITS, the technology division of The Financial Services Roundtable. “Consumers who choose to benefit from the convenience of shopping from a smartphone or laptop are realizing that safe cyber practices are paramount to protecting their information and money.”

During the last quarter of the year, the duration of cyber attacks can increase as cyber criminals attempt to take advantage of peak transaction periods during the holidays. Smocer recommends using security and anti-virus software on your computer and keeping it up to date with the automatic update function as two basic steps to significantly improve online security.

For safe online holiday shopping this season, BITS recommends consumers:

  • Always use virus-detection system, a firewall and spyware/malware detection software.
  • Always use a pop-up ad blocker.
  • Shop secure sites. Look for web addresses with “https://” or “shttp://”. Secure sites are also designated by a secured padlock icon within the browser. 
  • Be aware of holiday shopping scams, including clicking on deals that seem too good to be true or emails suggesting an issue with an online purchase.
  • Never open a suspicious link.
  • Shop online retailers you know and research sellers to ensure they are a reputable business. 
  • Don’t send cash or wire money when buying gifts online.
  • Never email your credit card or checking account number.
  • Monitor your financial accounts frequently for fraudulent activity.

To learn about holiday scams to watch for, visit McAfee Warns Consumers of the “Twelve Scams of Christmas”

For more safe computing tips, visit staysafeonline.org to learn how to keep a clean machine, conduct transactions safely on a computer and mobile device, protect your digital self and contribute to a stronger digital infrastructure. 

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Auto-Enroll Boosts Employee Retirement Planning by 82%

A recent AdvisorOne article using analysis from Fidelity shows that the auto-enroll feature of retirement plans increases employee participation by an astounding 82%. This feature is helping to boost retirement planning especially among the younger workforce. Fidelity cites that only 20% of employees between the ages of 20-24 participate in retirement plans without auto-enroll, but the percentage jumps to 76% with the feature.

Social Security makes up about 40% of the average retirees’ income, and can not realistically sustain the average worker’s retirement. Planning ahead and finding simpler ways to keep financially secure is the key to success, and starting early can pay big dividends in the future.

Click here to learn more about saving for retirement.

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