Bank Stress Tests Bad For Lending, Says BoA

Bank of America Chief Executive Brian Moynihan is speaking publicly about the potential negative implications of bank stress tests. Reports by The Wall Street Journal this week said the executive is warning that stress tests could force financial institutions to tighten their purse strings when it comes to lending.

“It will make you very safe,” he said at the publication’s CFO Network conference held Monday night (July 13), with regards to federal stress tests. “The question is whether it restricts lending.”

These tests aim to enlighten regulators of banks’ strategies amid a variety of economic situations, like recessions. But they force steeper capital requirements on these FIs that could otherwise be used for lending purposes, Moynihan argued.

According to the executive, Bank of America has shored up $400 billion in liquidity, up from $100 billion, to adhere to capital requirements. “We could lend more money if the capital levels were different,” he stated.

While these capital requirements are designed as a sort of insurance for banks, Moynihan added, it is unclear whether the requirements are appropriate.

“You had to have a conservative nature of everything because, at the end of the day, you’d have to assume that the business decision was going to go wrong at the worst possible time and hold capital,” the BoA chief stated, reports said. “That’s the stress test.”

Reports said the Federal Reserve is slated to release the results of its most recent stress tests on the banks later this month. The last round of tests saw the FIs “essentially” pass, reports said, though Bank of America, JPMorgan Chase and Goldman Sachs, among others, were required to adjust their plans.