Federal Reserve Announces 3rd Round of Stress Tests

The US Federal Reserve announced on Tuesday it will soon begin a third round of stress tests on the nation’s largest banks to ensure they will be able to withstand a possible economic downturn which could result from the escalation of the ongoing sovereign debt crisis in Europe. European leaders recently agreed on a plan to save Greece from defaulting, only to see the crisis escalate in Italy, Spain, and France, the region’s fourth-largest economy. Should one or more of these nations wind up defaulting, the European Commission will likely be ill-equipped to prop it up, given the enormous amount of money pumped into the Greek economy.

The Fed first performed stress tests on major US banks in the spring of 2009, with the nation’s largest 19 financial institutions participating. That first round of tests reassured investors that the banks had sufficient resources to get through the recession and recover from the 2008 financial collapse. For the third round of stress tests, 31 banks will be evaluated thanks to a regulatory reform law passed last year that requires banks with assets of $50 billion or more to take part.

The 31 banks now have until January 9th to submit required information to the Fed, who will then determine if the banks have enough reserves to withstand potential loan losses that could result from a double-dip recession. Fed officials have not indicated when the results of the stress tests will be made public.