US Fed Reserve require stress tests on banks

By Marc Castro

Nov 02, 2013 11:03 AM EDT

JPMorgan Chase & Co and Citigroup Inc are amongst the list of banking institutions that are required to show their ability to survive the demise of a trading partner or a high risk business loan value decline. These are but some of the scenarios showed in the 2014 version of the US Federal Reserve Bank's stress tests.

These possible solutions for the tests, as outlined by the Federal Reserve through a statement issued yesterday. This reflects some of the most pressing possible threats determined by regulators as they determine the fiscal ability of the US financial system to ride out economic shocks. The banks would have to exhibit the resulting effects in the valuation of the leveraged loans they keep, such as the imapxt of another housing bust as well as their chances of survival if a firm that has a substantial debt with them folds or collapses.

The Fed would be using the tests to encourage the thirty of the biggest financial institutions in the US to create capital cushions to shield them against economy altering events. The tests are based on hypothetical adverse conditions and not just forecasted possibilities. Of the thirty, only twelve banks would be subject to this kind of testing for the first time.

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