News Americas, NEW YORK, NY, Mon. Dec. 16, 2013: The Federal Reserve published its annual Comprehensive Capital and Analysis Review (CCAR) for 2014 on November 1. The stress testing report for 30 covered bank holding companies (BHCs) in the United States includes 18 institutions that have taken part every year since 2011, and 12 more participating for the first time. The purpose of CCAR is to evaluate the viability of covered BHCs (those with more than $50 billion in total assets) and to provide guidance with their processes to ensure sufficient capital is available in times of financial distress, according to the Fed.
Though this year's version of CCAR is very similar to its 2013 predecessor, policies implemented by the Federal Reserve late last year could result in similar or worse economic conditions than 2008.
Experts Weigh In
Moody's Investor Services lowered the rating of four major U.S. banks in November after the company's other subsidiary, Moody's Analytics, evaluated the 2014 CCAR. It determined that the "Severely Adverse" hypothetical scenarios presented by the Fed could realistically drive unemployment rates to levels higher than those in late 2009. The "Adverse" scenarios presented assume that international investors lose faith in the Fed's policy of buying $85 billion per month in mortgage-backed securities and U.S. Treasurys. A subsequent slowdown in international U.S. bond investments would cause a natural correction with interest rates, forcing them to rise dramatically.
This scenario would force the federal government to raise taxes and would expose the artificial recovery the Fed created via quantitative easing. Mark Zandi, Chief Economist for Moody's, told BusinessWire that it's become essential for the Fed to continue QE indefinitely to avoid the consequences that will inevitably come with tapering it off.
The "Severely Adverse" scenario assumes a continual economic decline in Europe and several other emerging markets around the globe. But Mario Draghi, president of the European Central Bank, gave a rosy (and somewhat cautious) forecast for Eurozone nations at an early December press conference. The ECB raised its forecast for projected growth to 1.1 percent, a number the New York Times called "torrid economic expansion" relative to all the issues Europe has endured during the last five years. Despite Draghi's enthusiasm, unemployment in the eurozone was 12.1 in October, down from 12.2 in September, which represents the first time the rate has fallen since 2011.
What This Means For You
Americans concerned about a potential recession can hedge their wealth against inflation by diversifying their portfolios and investing in non-U.S. dollar based funds. Look into investing in foreign safe-haven currencies like the Swiss franc and Norwegian krone. Precious metals have always been a great inflation hedge, and both gold and silver are currently trading at their lowest prices since 2010. Many Americans are also cutting back on spending during the holidays. A Harris Interactive poll published in November found that 57 percent of those surveyed feel that it is not their responsibility to needlessly spend money to heal the economy.
All covered BHCs are required to submit their capital plans, as they pertain to CCAR, to the Fed no later than January 6.