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Dodd-Frank’s Stress Tests

Posted By Morgan Dixon, Tuesday, June 27, 2017

The Dodd-Frank Act has been very unpopular with insurers and with insurance in general. Most of the ire has come from decisions by the super-secretive Financial Services Oversight Council (FSOC) that ended up tabbing AIG, MetLife and Prudential as systemically important financial institutions (SIFI) and more insurers were in the council’s crosshairs.

Insurers and insurance organizations like the PIA lobbied hard during the formation of Dodd-Frank against including insurers in the same financially dangerous class as banks. The two industries have very little in common. Insurance is heavily regulated by state insurance departments and are — thus — subject to very strict financial regulations.

And banks? Well, you know the story.

As for insurers. AIG was a bit different story and everyone pretty much understood giving the company that designation. MetLife fought its designation in court and won. It’s doubtful the Trump administration will appeal the judge’s decision. Insurers like the idea of a watered-down Dodd-Frank that gets them out from under the FSOC thumb.

Banks hated Dodd-Frank right out of the chute. The extra supervision by the Federal Reserve and the extra financial rules didn’t sit well with them. All have hated the annual stress tests. Most have been thrilled that the Trump administration and a now Republican-controlled Congress is going to try to do away with Dodd-Frank, or at the very least water it down.

Last week the nation’s largest banks were stress-tested for the 7th time to see how they’d do under a severe economic hardship. The test is to determine whether they’d still be able to lend through a crisis.

The tests — if you’ve never heard — are tough for the 34 banks impacted by Dodd-Frank. This year’s scenario places the banks in a global recession deemed severe. The U.S. unemployment rate is between 5.25% and 10%. The corporate lending world is under tremendous strain as is real estate. During this crisis, the bank drops $383 billion in loan losses over nine quarters.

Fed governor Jerome Powell said, all the banks passed with flying colors.

“This year's results show that, even during a severe recession, our large banks would remain well capitalized. This would allow them to lend throughout the economic cycle, and support households and businesses when times are tough,” Powell added.

That’s also good news for the Senate Banking Committee and its Chairman Republican Sen. Mike Crapo of Idaho. His committee is looking into Dodd-Frank reforms and this is the kind of news needed to proceed. “We’re engaged in an effort to identify statutorily where we can make things better. We need to get the right balance in our system so we can have the strongest economic engine that we possibly can,” Sen. Crapo said.

Source link: The Hill

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