Four years after the financial crisis, Federal Reserve Chairman Ben Bernanke says the economy and the nation's banks are in a much stronger position thanks to government intervention and a series of confidence-building stress tests.
Bernanke made these statements at the Atlanta Fed's conference in Stone Mountain, Ga.
Bernanke told attendees, "In remarks at this very conference, I described the 2009 Supervisory Capital Assessment Program, or SCAP, popularly known as the bank stress tests. The SCAP marked the first time the U.S. bank regulatory agencies had conducted a supervisory stress test simultaneously across the largest banking firms."
The SCAP marked a pivotal turning point in the financial crisis, restoring confidence in the banking system and enabling its successful recapitalization, Bernanke said.
Moving forward, the Federal Reserve has expanded to two distinct but related supervisory programs that rely on stress testing: the Dodd-Frank Act stress test and the Comprehensive Capital Analysis and Review, the Fed chair noted.
"The results of the most recent stress tests and capital planning evaluations continue to reflect improvement in banks' condition," Bernanke said.
In the most recent stress tests, projected aggregate loan losses under this year's most stressful scenario, the so-called severely adverse scenario, were 7% lower than the comparable figure last year, in part because the riskiness of the banks' portfolios continues to decline, Bernanke said.
Additionally, he mentioned, "Even under the severely adverse scenario of the latest stress test, the estimate of these firms' post-stress tier 1 common capital ratio is more than 2 percentage points higher than actual capital levels at the end of 2008," which means the firms are in a better position to absorb future losses.
The economy is significantly stronger, but conditions are still far from where the Federal Reserve would like them to be.
Bernanke explained, "The Federal Reserve continues to increase the transparency of our stress testing process, the results of the exercises, and our assessments of banks' capital planning."
He added, "The resilience of the U.S. banking system has greatly improved since [four years ago], and the more intensive use and greater sophistication of supervisory stress testing, as well as supervisors' increased emphasis on the effectiveness of banks' own capital planning processes, deserve some credit for that improvement."