The Fed is opening the kimono a little more—this time to the banks.
The Federal Reserve Bank of Boston on Wednesday convened bank officials for a two-day symposium to discuss stress tests—the make-or-break bar set by the Fed that determines which banks are well capitalized enough to return money to shareholders.
The test's stakes are high, but its details are few: Most banks have complained that the Fed's methodology is too opaque and that banks are modeling for too many unknowns. The symposium will be the second annual attempt to change that, with one big elephant in the room—interest rates.
The Fed might not be raising interest rates in the near term, but that hasn't stopped fixed income investors from rushing for the exits, causing yields to spike, and prices to plummet. Outflows from bond mutual funds and ETFs in June so far have totaled $61.7 billion, data from TrimTabs show, even higher than the outflows during October 2008 at the height of the financial crisis.
It's an excruciating risk for banks in the business of underwriting low-interest mortgages and bonds, which—if left on the balance sheet—have been declining sharply in value before the higher interest income materializes.
"We need to be prepared for rapidly rising rates, potentially even worse than we have seen in recent history," JPMorgan Chase CEO Jamie Dimon wrote in his letter to shareholders, citing the fallout from 1994 and 2004, when short- and long-term rates rose 300 basis points within a year.