Name: Harvard professor: Bank stress tests won't save us from financial crisis
Uploaded: 2016-10-18T14:00:38.000Z
Duration: 4 min 2 s
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SEANA SMITH: It's a big week for Wall Street.

To-infinitive

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

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

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

Professor Scott, thanks so much for joining me today.

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

results minutes before the UK polls close on the Brexit vote

What do you expect from this year's results?

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

What happens if regulators aren't satisfied with

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

to fund withdrawals, they would be basically insolvent.

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

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

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

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

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

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

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

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

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

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

challenge for banks, assessing their ability against negative

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

What those depositors would do would be take their money out

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

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

Do you think bank stress tests are a good idea?

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

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Harvard professor: Bank stress tests won't save us from financial crisis

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