If Your Bank Failed the Stress Test

May 26, 2009
Special Feature

When the Federal Reserve announced the results of the bank stress tests, was your bank among the black sheep? Or was it one of those that got a clean bill of health? And what difference does it make to you?

When the Federal Reserve announced the results of the bank stress tests, Bank of America was told to close a $34 billion capital gap, Wells Fargo has to come up with at least $13 billion, and several other banks were tagged as lacking enough cash to withstand a worst-case economic scenario. Was your bank among the black sheep? Or was it one of those, including Goldman Sachs, American Express, and JP Morgan Chase, that got a clean bill of health? And what difference does it make to you?

According to banking industry observers, the results of the stress tests will have little effect on your day-to-day relationship with your bank. Your deposits will still be insured by the Federal Deposit Insurance Corp. for up to $250,000 per account. You’ll still be able to use your credit card when you shop at your local retail store or online. Even if your bank gets into trouble or fails, your mortgage will still be in effect and you’ll still have to pay it off, even though it may be held by a different bank.

If you own stock in the bank, however, there may be some effect on your holdings if your bank fails the stress test. Banks will have a choice of methods to bolster their capital holdings: sell assets, sell additional stock, or tap into the government’s TARP money vault. Whichever route the bank chooses, it could dilute the value of the bank stock that’s already in your portfolio. Market analysts also warn that a passing grade on the stress test doesn’t mean a bank’s stock is a good buy. Banks still face major challenges from bad loans and a dicey real estate market, making them a risky investment.