Thursday, February 4, 2016

Fed Stress Tests

Since we talk about all things financial here I felt I should briefly discuss the Federal Reserve bank stress test announcement from last week.

For 2016 stress tests banks have been asked to play out negative US Treasury rates in their models. Interesting since this is the case already in Europe with negative rates set by the ECB. The tests allow us to see what concerns they raised behind closed doors well before it becomes public.

The article quoted a Fed Governor "“It is important that the tests not be too predictable from year to year.” I find it laughable to believe that's the rationale for the scenarios inclusion. If this is how they come up with the tests we should be concerned about the people running the place. I'm not sure why the Fed thinks this is a worry enough to include it in the tests but they did.

I still think that the longer trend is for European banks to deposit money at the Fed and take it out of the ECB system while there is a difference in rates. It would just make sense if you were running the business to do that. It's free money from the Fed on deposits.  I'm not quite sure how this plays outs. It could keep the rising dollar trend intact, but what effect it has on Fed policy is beyond me right now until I put more research and thought into it. Just thought it could be informative for people to be aware of.

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