Why Stress-Test Large Banks?
By Julie L. Stackhouse Earlier this year, Treasury Secretary Timothy Geithner outlined a comprehensive plan to restore stability to our financial system. The plan encompasses several components, including a public/private investment program for legacy loans and securities, a mortgage refinancing program and a Capital Assistance Program (CAP). The CAP has received significant attention because it serves as a complement to the recently completed “stress- test” of the nation’s 19 largest financial organizations. The stress-test is a forward-looking assessment by bank supervisors, intended to ensure that these very large banks remain well-capitalized in the event of a worse-than-expected recession. So, why was it beneficial to stress-test large banks? Large-bank lending is of vital importance to the health of the economy. Large corporations redeploy loans from large banks into productive economic resources. Without a healthy financial system, economic growth weakens. Market concerns over t
