Markets & Finance

Bank Stress Tests: What They Mean for Consumers


Consumers probably won't see major changes in day-to-day services, regardless of how their bank performed in the government's stress tests

By Candice Choi, AP

It might be alarming to hear your bank needs to raise billions of dollars in a short time as prescribed by the government's stress tests. But you likely won't see any major changes in day-to-day services regardless of how your bank performed.

The stress tests on the nation's 19 largest banks that were finally released on May 7 were intended to gauge whether the banks could weather another major downturn. Ten of the banks, including Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC), were told they need to raise capital—in most cases, billions of dollars. The others were declared stable.

That's not to say banks in the latter group will stop hiking credit card fees or lowering interest rates on deposit accounts—trends that have been under way for several months now. Still, the stress tests do have implications that everyday customers should consider. Here are some questions you might have about how the stress tests might affect your banking experience.

Q: First off, is there any reason I should switch banks if mine was determined to need more capital?

The stress test results don't have any bearing on ordinary deposit accounts, which are insured by the Federal Deposit Insurance Corp. After the financial crisis accelerated last fall, the government raised the limit insured for individual depositors, from $100,000 to $250,000, through the end of this year.

One possibility to consider is that your bank could sell off one of its units. Even if that happened, the accounts with the unit would remain FDIC-insured—and any changes you'd see would boil down to customer service. Depending on the new owner, the only difference you notice might be the name on the door.

What if I'm looking to open a savings account, CD, or money market account? Will the best rates come from the healthier banks, or the less healthy ones?

In theory, a bank could raise cash by offering more competitive interest rates and attracting greater deposits. But the boost wouldn't be big or fast enough to meet the demands of the stress tests. "That's a very slow process, and the stress test is more of an immediate need," says Brian Bethune, an economist at Global Insight.

Besides, the tests are expected to factor in how much banks could reasonably generate through operating earnings, Bethune says. So any capital requirements spelled out in the stress test results would be in addition to that.

One area where customers might get a break is with loans, Bethune says. The banks deemed healthy will likely be able to get lower interest rates on wholesale funding, which can be passed to consumers in the form of lower mortgage and auto loan rates.

The benefit would be for the creditworthy, of course. Banks long ago clamped down on people with poor credit histories, meaning their chances of getting a loan won't improve anytime soon.

Let's say the stress test determined my bank needs to raise a lot of capital. Should I brace myself for interest rate hikes on my credit card?

It's very possible you could see rates and fees go up, but that's nothing new these days.

Banks have been slashing credit limits and raising interest rates on credit cards for the past several months. This is part of the banks' ongoing struggle to reduce risk and raise revenue. Banks are also responding to new, unprecedented regulations in the credit-card industry. As such, you should already be keeping a sharp eye on your credit-card statements.

If I'm an investor, what will happen to my stock?

Banks might raise capital by converting private preferred shares to common stock. If you hold any common stock in the bank, this could dilute the value of your shares and dividends. If you're a holder of a preferred stock, which gives you greater rights to the company's assets, you shouldn't see any change.

It's not necessarily a great idea to invest in banks deemed stable, either. With all the leaks about the test results leading up to the May 7 official announcement, stock prices have largely adjusted for the results. "At this point, the results are already priced in," Bethune says.

So is there any impact at all on my accounts?

The idea behind the stress tests was to restore confidence in the nation's banking system, which regulators see as key to rehabilitating the economy. In turn, consumers would see improved interest rates and credit availability. The question, of course, is how investors react to the stress test results and how the banking industry fares in coming months.

"The economy is not going to turn around until people have confidence in the system. That's the first domino to fall [and the key] to getting the economy to turn around," notes Mark Tedhundfeld, spokesman for the American Bankers Assn.


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