This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Stress Test Distorts European Crisis: Analyst

NEW YORK ( TheStreet) -- The Federal Reserve's stress test models envision a much harsher downturn in the U.S. than Europe despite current reality , according to KBW analyst Frederick Cannon.

The Fed requires banks with large trading operations- Bank of America (BAC - Get Report), JPMorgan Chase (JPM - Get Report), Citigroup (C - Get Report), Goldman Sachs (GS - Get Report), Morgan Stanley (MS - Get Report) and Wells Fargo (WFC - Get Report) to conduct a stress on their trading book and private equity positions based on price and rate movements that occurred in the second half of 2008. The central bank focuses on that period because it was a time of severe market dislocations and the failure of a major globally active financial institution.

The banks will also have to consider additional stresses from the ongoing situation in Europe, although the scenarios envisioned in Europe aren't quite as harsh as one would expect.

"In trying to duplicate the financial crisis of 2008-09, in recreating that, the [test] assumes a downturn in Europe that is less severe than in the U.S. But the economic conditions are usually worse at the epicenter of the crisis," Cannon told TheStreet in an interview. "A more realistic scenario will be a deeper crisis in Europe and a lesser one in the U.S."

In its adverse stress scenario, for instance, the Fed assumes U.S. real GDP growth to drop by nearly 5% in the fourth quarter of 2011 and nearly 8% in the first quarter of 2012. In contrast, it assumes the real GDP growth in the Euro area- the 17 nations in the euro block- to decline by only 1% in the fourth quarter of 2011 and contract by about 4% in the first quarter of 2012.

Given that the stress test is modeling for a more severe downturn in the U.S. than in Europe, it is likely to be harsher on regional and domestically focused banks than it would be on the large global banks. In other words, the test applies more pressure on Wells Fargo than it would on JPMorgan, according to Cannon.

Still, the Fed's economic assumptions for Europe are much tougher than what the European bank stress tests have so far modeled. "The Fed is challenging European banking regulators to conduct tougher stress tests," said Cannon.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
C $45.57 0.00%
BAC $14.24 -0.84%
GS $163.14 0.00%
JPM $62.56 0.00%
MS $26.89 0.00%


Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs