This week, the Federal Reserve will present the results of stress tests designed to ensure that the largest U.S. banks won’t turn the next financial crisis into an economic disaster. There’s just one problem: If the tests were realistic, most of the banks would fail.
Previous stress tests helped to restore confidence in the U.S. banking sector after it almost collapsed in 2008. The idea is to show what would happen to standard measures of financial strength, such as capital ratios, in the worst of times. The tests force banks to consider risks that, in their quest for quarterly profits, they might otherwise ignore.
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