Fed Flunkies and the Unflunkables: 2019 Bank Stress Test Now Officially a Total Sham

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via Reuters:

The U.S. Federal Reserve said on Wednesday it would no longer flunk banks based on operational or risk management lapses during its annual health check of the country’s domestic banks.

 

The “qualitative” portion of the 2019 test, however, will still apply to the U.S. subsidiaries of five foreign banks subject to the annual exam.

The move, which is a big win for major banks, such as Goldman Sachs Group Inc, Morgan Stanley and JP Morgan, Bank of America and Citigroup, forms part of a broader effort by the Fed to overhaul its annual “stress-testing” process, which the industry has long criticized as too onerous and opaque.

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Since the 2007-09 global financial crisis, the Fed has put the country’s lenders through strict annual tests to see whether they would have enough capital to withstand a major economic downturn.

For the largest lenders, that test also included a so-called “qualitative objection,” that gives the Fed the discretion to fail banks due to risk management or operational failures, even if they have sufficient capital.

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