Stock Market Insights: Stressed banks and the stress test we need

“I never want to back a boat trailer in again.”

Some of the greatest stress in my marriage was trying to help my wife back the boat trailer down a ramp. She didn’t want to load the boat or back the trailer, so the whole process became a stress test. U.S. big banks just went through a stress test of their own. The big banks are fine, but regional banks still have unknown risks.

The Federal Reserve just announced the results of its annual stress test of America’s largest 23 banks to see if they would survive a major financial disaster. All 23 big banks passed the test.

This year, the hypothetical financial disaster was a global recession that led to 10% unemployment, a 40% drop in commercial real estate prices and a 38% drop in home prices. All the banks would have enough cash to survive and function even in this worst-case scenario.

America’s biggest banks did better than expected and even better than last year. This year’s test had more significance since it came just months after a mini-bank crisis that saw three of the largest bank failures in U.S. history.

Unfortunately, the Fed still isn’t testing the regional banks with assets of $10 billion to $100 billion. It’s comforting to know the big U.S. banks are strong, but as an investor, I want to see the health of the regional banks. What happens if real estate prices drop 40% and all those regional banks get hit?

The Fed said in its press release that the banks in this year’s test hold “20 percent of the office and downtown commercial real estate loans held by banks.” What about the other 80% loans on downtown buildings? Regional banks are the largest lenders of U.S. commercial property and construction loans, according to the Reuters article, “Overexposed U.S. regional banks.”

If we have another banking crisis, the big banks are there to save the day, but to the detriment of small businesses who bank at suspect regional banks.

The Fed needs a regional bank stress test. Frankly, they were caught off guard by Silicon Valley Bank’s failure, and they are the ones we pay to monitor banks. The Fed hinted that it would be adjusting the stress tests to make them tougher. Let’s hope they add regional banks to the changes.

The market climbed after the bank report was released, even though markets still have to deal with the regional bank’s unknowns. Investing is a dance. Wise investors stay engaged but continually make adjustments as needed.

We’ve been married 26 years, and one of the secrets of that success is that I no longer ask her to back up a boat trailer. I never thought buying a boat dock would help my marriage but it absolutely relieved marital stress.

Have a blessed week.

Fervent Wealth Management is a financial management and services entity in Springfield, Mo. Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.

Opinions are for general information only and not intended as specific advice or recommendations. All performance cited is historical and is no guarantee of future results. All indices are unmanaged and can’t be invested in directly.

The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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