Last week, the Federal Reserve released its findings for the annual “stress tests” for 34 major banks and brokerage firms. These tests run what-if scenarios for liquidity, capital adequacy, and the broad ability to survive another period like 2007-2009. In addition to the market chaos for average investors, it was a period of failures, forced mergers, and bailouts (Lehman Bros., Merrill lynch, and Citigroup, for respective examples) for the major investment banks. The stress tests were developed to help the Federal Reserve spot isolated problems before they became systemic.
All of the 34 banks and investment firms passed this year. Fed Chair Janet Yellen spoke Tuesday, and said she believed there would be no new financial crisis “in our lifetimes.” We hope not, and as long as the regulatory bodies keep their eyes on business, we should be fine.
A bit of background for those who aren’t immersed in this on a daily basis. The “banks” involved in this testing are not the community banks that take deposits in, make loans to local business and personal borrowers, and contribute to the healthy growth of the markets in which they operate. The major banks may have a local presence, but the Fed’s concern is not with your mortgage loan balance but with what happens in the bank’s trading and product areas.
It wasn’t car loan defaults that caused the credit crisis; it was the near-uninhibited use of leverage and creation of esoteric derivative instruments that, when the trickle of problems started, turned into an avalanche. One of Ernest Hemingway’s characters described going bankrupt – slowly at first, and then all of a sudden. Once the avalanche started in 2007, it was too late to stop except through extraordinary means.
The major global banks and investment firms are safer today. They carry higher capital levels, their derivatives activities are more controlled, and they have to keep some “skin in the game”. It’s amazing how having your own capital at risk focuses your attention on controlling the risk you take. Community banks have lived this mantra since their inception; it’s good to see the megabanks operate under the same standards.
And Security National Bank? While we are not one of the 34 largest, we undergo regular internal tests and examinations by independent accountants and the Comptroller of the Currency. We are pleased with the reports provided, and we act quickly to adopt recommendations made by our regulators. We are considered “well-capitalized” by Federal Reserve standards, and we are proud to have served our communities safely and well for over 130 years.
So, relax and enjoy the summer. Janet Yellen told us everything is ok, and she has proven herself a strong, conservative Fed Chair. But always keep an eye open for the unexpected. And let us “stress test” your portfolio to insure it will meet your goals and tolerance for risk. Call your Security National Bank Wealth Management advisor today for an appointment.
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