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  • SEANA SMITH: It's a big week for Wall Street.

  • The Fed is set to release its first round of stress test

  • results on Thursday.

  • They're used to determine whether or not the largest US

  • banks could weather a major crisis.

  • Here with more on this is Hal Scott.

  • He's a professor at Harvard and just wrote the new book,

  • "Connectedness and Contagion."

  • Professor Scott, thanks so much for joining me today.

  • HAL SCOTT: Happy to be here.

  • Thank you.

  • SEANA SMITH: So the Fed is set to release its stress test

  • results minutes before the UK polls close on the Brexit vote

  • tomorrow.

  • What do you expect from this year's results?

  • HAL SCOTT: After the 2008 crisis,

  • we greatly increased bank capital.

  • That's good.

  • It's now around 15% of equity for the largest banks.

  • But in a financial panic, if there was a run

  • on the financial system, which is really just the story

  • of my book, 15% of capital is nowhere near enough

  • to withstand the effect of a run on the financial system.

  • And unlike 2008, where the Fed had very strong powers as did

  • the FDIC and the Treasury to stop a contiguous run,

  • we were much less able to deal with that now because those

  • powers have been restricted under the rubric of "we

  • don't want to bail out Wall Street again."

  • SEANA SMITH: And the Fed recently determined that five

  • of America's largest banks, and those include Wells Fargo,

  • JP Morgan, Stage Street, Bank of New York Mellon,

  • and Bank of America, that they don't have credible plans to go

  • through another bankruptcy.

  • What happens if regulators aren't satisfied with

  • their wells.

  • HAL SCOTT: They would, if they did not have enough money

  • to fund withdrawals, they would be basically insolvent.

  • And people would lose their money.

  • By the way, this is not just a problem for banks, you know.

  • 2008, it was the non-banks, the broker dealers,

  • the money market funds, and capital requirements that have

  • been set by the Fed don't apply to them.

  • So really we should be just as worried about the non-banks

  • as we are about the banks.

  • SEANA SMITH: And which bank do you think is under the most

  • pressure tomorrow on Thursday?

  • HAL SCOTT: There's no particular bank that's under particular

  • pressure.

  • This is more going to be a system-wide issue,

  • if there is a problem at all.

  • By the way, I think that the probability of a panic is

  • extremely small, whatever the vote, OK.

  • And my only concern is, although it's extremely small,

  • if there were to be one, the impact would be very,

  • very large.

  • And so, unfortunately, I don't think the United States is

  • in the position to deal with it as well as it was actually able

  • to do so in 2008.

  • SEANA SMITH: And this year, the Fed threw in an additional

  • challenge for banks, assessing their ability against negative

  • interest rates.

  • Does this new step make more banks at risk of failing?

  • HAL SCOTT: Well, negative interest rates,

  • if it actually hit depositors, we're now going to have to pay

  • the banks to hold their money.

  • What those depositors would do would be take their money out

  • and put it under the mattress.

  • Indeed, we'd have a new business opportunity for store-housing

  • cash because people would be better off having cash

  • in a storehouse than having it in a bank,

  • where they actually have to pay the bank to hold their cash.

  • Maybe the storehouse will charge a lot less than the negative

  • interest rate.

  • So I think there's really a limit on how far you could go

  • with negative interest rates on deposits.

  • And that then limits the ability of your central banks to use

  • negative interest rates to try to increase inflation

  • and growth.

  • SEANA SMITH: All right, Professor Scott,

  • thank you so much for joining me today.

  • HAL SCOTT: My pleasure, thank you.

  • SEANA SMITH: And now, it's your turn.

  • Do you think bank stress tests are a good idea?

  • Why or why not?

  • Let us know what you think in the space below or on the Yahoo

  • Finance Facebook page.

SEANA SMITH: It's a big week for Wall Street.

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