Big banks are suing the Fed over stress tests
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For those of us old enough to remember it, it's hard to fathom that 17 years have already passed since the 2008 financial crisis. It was the worst economic crisis since the Great Depression. Though the Trump administration's recently launched trade war against our closest and largest and most peaceful trading partners may eventually give 08 a run for that title.

Now, the 2008 crisis was triggered by greed, lax regulation, and trust in the financial industry to monitor itself. In the years running up to that crisis, millions of home mortgages were handed out to people who eventually would not be able to pay them.

The nation's biggest banks had created complex assets out of those mortgages, sold and resold them to each other, and were so tightly intertwined that when the bottom fell out of the mortgage repayments, it threatened to take the entire financial industry with it. Millions of people lost their jobs, lost their homes, lost their retirement savings. Markets were wiped out. But the big banks themselves? They got a federal bailout.

For years, policymakers and regulators would hold hearing after hearing to figure out exactly what went wrong. Good morning. Welcome to the public hearing of the Financial Crisis Inquiry Commission. This is our second day examining the issue of financial institutions that have become too big, too important, too systemic to fail.

That's Phil Angelides, chair of the congressionally created Financial Crisis Inquiry Commission back in September 2010. Too big to fail. Well, that day, the commission heard testimony from then Federal Reserve Chairman Ben Bernanke.

A liquidity problem, meaning that banks did not have enough liquidity or capital to weather a crisis, or put more simply,

They did not have enough money in their own reserves to cover sudden and massive losses. You know, you as an individual are told to do that, right? Like have some savings put aside if you can so that when times are tough, you'll be okay. Well, the banks did not have that.

In that same hearing, Phil Angelides asks... Shouldn't have systemic risks been part of a safety and sound regime even in the 2000 period? Was this a substantial miss? How fundamental was the failure of proper supervision to the metastasizing of this problem?

It's certainly true that the system did not sufficiently anticipate the systemic risks associated with these institutions. That was frankly partly due to the regulatory structure that was given to us by Congress. As you mentioned, our charge was to focus on the safety and soundness of individual institutions. There was no provision, no authority to address systemic risk in an institution.

So let's translate that a little bit. What Ben Bernanke is saying, there was no regulation to be sure that banks who do business with each other would not financially harm each other. Now, prior to Bernanke, Alan Greenspan chaired the Federal Reserve from 1987 to 2006, and he was famous for his regulatory hands-off philosophy of markets. Although way back in the 1990s, he also warned against irrational exuberance in what was then known as the dot-com bubble.

In the run-up to the 2008 financial crisis, however, banks could have been similarly warned, but weren't. Here's Phil Angelides again. So how much of this was also a function of a shift away from an aggressive regulatory regime to, frankly, just a common view that we should be more reliant on self-regulation, internal risk management by the institutions, and replacement of regulation?

Well, I think there's some truth to that. There was some change in, I think, an overall philosophy. As firms became more complicated, there was a greater and greater understanding that regulators could not replicate all the risk assessments that the firms themselves could do, and we had to rely more on their own assessments, and instead of looking at the risks themselves, making sure that they had good systems in place and that they were taking appropriate steps to address those risks.

Once again, that second voice was then Fed Chair Ben Bernanke. Alan Greenspan has since conceded that he was wrong to think that laissez-faire is the best overall approach to markets that have power to sink the U.S. economy. I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such as that they were best capable

capable of protecting their own shareholders and the equity in the firms.

As mentioned, the banks were chided, but not really restructured. Instead, they got a $700 billion bailout from the federal government. The first $250 billion straight from the Treasury Department. It was handed out in a matter of hours one weekend in October of 2008 when it looked like the entire U.S. financial system was merely hours away from total collapse. The catastrophe was enough to introduce a new era of financial regulation.

In 2010, Congress passed the Dodd-Frank Act. It gave the federal government the authority to address systemic risk in financial systems. This included conducting annual so-called stress tests on the big banks. Now, the stress tests would evaluate large banks to ensure that they had enough capital to weather an economic crisis so a government bailout would never again be needed.

And in the 15 years since Dodd-Frank, there, in fact, has not been another liquidity crisis in America's financial system. So stress tests would seem to be working for now, but maybe not for much longer.

Now, we went over that history of the 2008 financial crisis because late last year, December 24th, the big banks sued the Federal Reserve. They are seeking to overhaul the stress tests. That could bring a shift back to less government oversight and more market self-regulation. The very things that some experts say led to the 2008 crash.

So this hour, we want to explore what exactly these stress tests are, how they work, and more importantly, how they keep the financial system stable.

And we're joined today by Shaina Oleschik. She's the director of banking policy at Better Markets, a nonprofit organization that's focused on the financial system. They're often referred to as a Wall Street watchdog. Shaina, welcome to On Point. Thank you for having me, Meghna. Also, by the way, a little later in the hour, we will hear from a representative of a major organization that advocates on the behalf of big banks. So we'll hear that voice a little bit later. But

Shaina, can we start with more stress test 101, right? Because I have to say I haven't been exactly 100% certain how they function. Is it like a simulation? What is it?

Sure. So I think it's important to remember that the only thing between a failing bank and a taxpayer bailout is ensuring that the banks have an appropriate cushion to avoid the bailouts that you were just talking about. So the stress tests are an annual exercise done with the largest banks in the country

to gauge their financial position and their current operations against what we think could be a stress scenario, something that looks like the 2008 financial crisis. Is it a computer program? Is it a tabletop exercise? Is it a spreadsheet? What is it?

Oh, no, this is a very big operation that the Federal Reserve does every year with countless experts, modeling experts, accounting experts, economists, financial analysts. So, no, this is a...

a very involved operation. And so essentially what they are doing, and correct me if I'm wrong, is they're getting some data from the banks themselves about their current balance sheets, let's say, and they're coming up with potential scenarios...

Another bank run, another sort of bottoming out of a certain sector of the economy, what have you. And then they're theorizing like what would happen to the bank's balance sheet in the event of that stress, as we're calling it.

I would call it more than theorizing. They're taking a scenario of severe yet plausible conditions. And the scenarios are all based on the 2008 financial crisis, which is

is something that I'd love to talk about if you'd like to. We feel like that's not a strong enough test because, as you mentioned earlier, during the 2008 financial crisis and in the years following, the biggest banks had to be bailed out. So basing a stress scenario on those conditions, we argue, is not stressful enough because the goal here is to

going ahead in the future to have a situation where the largest banks in the country can stand on their own and not rely on a government bailout. Yeah. No, I definitely want to talk about that more a little bit later in terms of what the baseline of the current stress tests are, the breakpoint, essentially. But do tell me a little bit more. So, for example, like what would be a typical stress scenario that the Federal Reserve would face

would use as a model for these annual tests? Sure. So in 2024, for example, last year, the stress scenario included unemployment rising, house prices falling, more stress in the commercial real estate markets, stress in the financial markets. So it's a comprehensive scenario or possible what might happen in the future sort of scenario.

scenario that they look at. So it's a combination of several different factors. And in addition, the Fed has also started what they're calling exploratory scenarios, which are more focused scenarios that look at a

more detailed case of stress, although those are not used to affect banks' capital at this point. Okay. So then the modeling is you, Bank X, have different kinds of exposures across these various parts of the economy that could become very weak under this scenario that we're putting forth. And so therefore, with that exposure, we're testing if

You can stay afloat, Bank X, correct? Correct. So a certain bank may have a lot of mortgage loans, for example, or a lot of loans to the commercial real estate markets. Okay. Hang on for a second. I'm sorry to cut you off in mid-sentence there. Just have to take a quick break and I want to hear a little bit more about what the consequences are if banks fail the current regime of stress tests. But we'll do that in just a minute. This is On Point.

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You're back with On Point. I'm Meghna Chakrabarty. And today, Shaina Oleschik joins us. She's director of banking policy at Better Markets. They are a nonpartisan nonprofit organization that focuses on the financial system. And Shaina's with us to help us better understand

Financial system stress tests that are mandated by federal law. They have been since the 2008 financial crisis. And we're talking about them now because late last year, a little over a month ago, representatives for the nation's biggest banks announced

issued a lawsuit or filed a lawsuit against the Federal Reserve asking to overhaul bank stress tests. OK, so, Shana, you were in the middle of an example of telling us what would happen if, again, theoretically, Bank X, as I'm calling it, told the Fed they have all sorts of exposure in different markets. And the Fed said, OK, here's our simulated crash scenario. And then and then what would happen? Go ahead, Shana.

So when the stress test is concluded, after the Fed takes in their comprehensive stress scenario and looks at the composition of each of the banks that are stressed, then they take

take a look at how much capital would be needed to make sure that that bank stays above the minimum capital level that is required. So every bank, the Fed puts out a press release at the end of their stress test, and it shows how much each of these large banks would need to

add to their reserves to protect against the specific stress scenario that was used. Got it. So to put it in more layman's terms, the Fed would say, OK, this is how much capital money literally that you would need, Bank X, in order to not need a bailout. Right.

Correct. Okay, but I'm going to get to this, I promise you, but the test doesn't necessarily say under this stress scenario, here's what would happen to everyday people who are banking with you.

Correct. It does not. Okay. What else can the stress test not actually tell us, right? Because the financial system is so complicated that one of the things that happened in 07 and 08 is that it was the crisis that revealed how systemically intertwined all these banks were with their exotic financial assets that they had created from all of those securitized mortgages, for example. Right.

Correct. So the stress tests do not show what sort of contagion could affect the American people. You know, as we saw in the 2008 crisis,

The ultimate cost of that included far more than the taxpayer bailout. It included everyday people losing their jobs, losing their homes, possibly putting off going to college if they didn't have enough money, possibly putting off retirement.

And the all-in cost of that, we've calculated as over trillions of dollars. So this issue goes far beyond the individual banks and really hits Main Street. But I understand, though, that the banks were doing their own internal stress test, right? It's impossible to imagine that they wouldn't, given the trillions of dollars that flow through the financial system, before 2008. Right.

They were, although the stress tests that they were doing were far more limited in their scope. They were not regulated or used in the way that the stress testing regime is now. One of the biggest advantages of the current system is that the results are comparable across all banks.

And so we can have a view of how different banks are in terms of resilience across a stressful scenario, not just what that one bank may think is the most reasonable. Got it. Okay. I see what you mean. So there was a high amount of variability in...

In reasonableness. Okay. And again, in a highly intertwined system, maybe that's not the greatest idea. For those pre-08 stress tests, were they required to report that to the Federal Reserve or the government in any way?

Not certainly not in the way that the current stress tests are. I mean, now we have an annual press release and a series of reports from the Federal Reserve that brings a lot of transparency to to the results of the test every year. OK. And what happens if a bank fails one of these annual stress tests, stress tests? And has that ever happened?

So that doesn't happen a lot. It certainly has not happened in recent years. And I would sort of caution against using the term pass or fail. You know, what we're seeing is the only thing that the stress tests really show us is how banks respond to that one stress test.

situation that's part of the test, you know if And in recent years, we've seen things like a pandemic We've seen things like huge interest rate increases And so if those factors are not what's tested then these stress tests and the results are actually giving us a false sense of security that that the banks are actually more resilient than they are So I think that's a big danger. Okay, I

I'm going to ask you later, though, you can't test for everything. So we'll get to that in a second. But to the point that you wanted to cover a little bit earlier, which is very, very important.

As you said, sort of the break line in these stress tests has to do with Dodd-Frank saying, well, a stress test shows that a bank is weak. If the result from the test is they would need a bailout. So why was that the threshold that was set by Dodd-Frank? Well, I think it was, you know, a question.

the best that we could come up with at the time. But, you know, as we've studied this further, it's very clear that, you know, basing success on on withstanding a crisis of the severity of 2008 is not necessarily the best baseline, especially for Main Street Americans, because

What we're effectively saying is that we're OK with having the government bail out these largest banks. You know, that is the measure of success. If banks can withstand a crisis of that severity, then we we call that success. And I just don't think that we the American people should not do.

should not stand for that being the definition of success here. I see. We should have a higher bar for the financial system, essentially. Absolutely. I mean, these are the largest banks in the country that, as you mentioned earlier, too big to fail is alive and well. So that's definitely not in the best interest of Main Street Americans. Well, we're going to hear from a representative of the banking industry in just a second. But

Another sort of layperson's question for you, Shaina. It sounds like it's only the biggest banks in the country that have to do this because we have had some bank failures in the past 15 years. I think the most recent high-profile one that comes to mind is Silicon Valley Bank.

Absolutely. And that's another point that I think is critical to understand is initially the Dodd-Frank stress tests included all banks with $50 billion or more in total assets. And during, I think it was 2019, that minimum size threshold was increased to $250 billion.

So, effectively, what this has done is it said any bank below $250 billion, which included Silicon Valley Bank, included First Republic Bank, you know, those aren't systemically important enough to cause a risk, to require a bailout.

But clearly what we saw in 2023 was that was not the case. These banks were, Silicon Valley Bank at least, was deemed to be so worrisome that it was given a systemic risk exception. So the fact that the stress test didn't even include that bank is a huge problem. Systemic risk exception? What does that mean?

So that means that the government can use extra measures to essentially bail out a bank that would otherwise fail. So it got a bailout anyway. Mm-hmm. Okay.

So, Shana, hang on here for a second, because as I said, we did speak to a member of the banking industry, an advocate for the banking industry and quite an important one. He's Greg Baer. He's the president and CEO of the Banking Policy Institute. And it is a group that represents the nation's biggest banks. And it is his group that co-filed this December 2024 lawsuit against the Federal Reserve to overhaul stress tests.

Now, Baer tells us they don't want to get rid of the stress tests, but in his words, rather just make them much more transparent. The banking industry has always been supportive of stress testing. Every major bank does stress tests. They actually run dozens or hundreds of stress tests because they want to ensure that they can survive a severe event, whether that's a severe recession or a market collapse if you're engaged in capital markets.

And I think we recognize that it makes sense for the Federal Reserve to think about bank capital in that way. It's just we want to make sure that the test makes sense, that it's looking at a reasonable, although severe scenario, and then also that it's calculating losses accurately.

Now, the lawsuit seeks to compel the Federal Reserve to share its test modeling so that the public can decide if the stress scenarios they are designing are reasonable and effective and if calculated losses are appropriate. We're going to come back to all that in just a second. Baer also tells us that banks are currently in the dark about modeling, which leads to uncertainty that he thinks hinders the financial industry.

Under the stress test, we're seeing very different results year to year, even though the bank's balance sheets have not changed. And what that means is the banks have to be prepared for their capital requirements to change significantly from year to year, which means they basically have to hold even more capital sort of as a cushion against uncertainty because they can't figure out why their capital requirements are going up and down so much. And if the banks are overcapitalized, Baer believes that negatively impacts the economy as a whole.

I think it's pretty hard to argue that they're not strong enough. You look at this has been going on for 15 years now. I don't think there's any evidence that the largest banks are undercapitalized or

there is considerable evidence that they're overcapitalized and basically that you're sacrificing GDP growth unnecessarily because there are formulas for calculating. If you raise bank capital requirements by X, you see a diminution in GDP of Y. And so there are reasons not to overcapitalize banks.

But again, if you look at real world experience and we've now had a lot of different shocks, a global pandemic, and you've not seen any sense at the large banks that they are undercapitalized. Baer believes with greater transparency, the stress test can be significantly improved. He and the big banks believe that the test would then confirm that they need to have less capital in reserve.

To the extent there's a lower capital requirement, that means that you're going to see more market intermediation in capital markets. It means you're going to see lower prices on loans. I mean, again, not terribly lower, but certainly lower. You might see commercial credit move from private credit to banks to some extent. And there are reasons you don't want to overcapitalize a banking system because it makes everything a bank does more expensive to its customers.

Of course, there are reasons why banks should hold a lot of capital. You don't want to replay a global financial crisis and their real costs to bank crises. The question, though, is has the pendulum gone too far? And, you know, the stress test is part of that pendulum.

So that's Greg Baer, president and CEO of the Banking Policy Institute. And again, they co-filed this lawsuit against the Federal Reserve on December 24th to overhaul stress tests. And by the way, the day before, December 23rd, the Fed announced it would soon seek public comment to, quote, "...improve transparency of bank stress tests and reduce volatility of resulting capital requirements," end quote.

Public comment has yet to be opened. So, Shana, let's just first of all start or pick up with what Bear said with that fact. Is it coincidental that the Fed announced that it would take a public comment on how to improve transparency of stress tests?

No, I don't think it's coincidental at all. I mean, the banks for years have hated the stress testing process, and I don't think it's coincidental at all. Okay. So let's sort of go through almost line by line with what Greg Baer says the banks' view of these stress tests are. First of all, his biggest concern is overcapitalization. And I think to put it simply,

What he's saying is that if the banks are holding a lot of money in reserve, that is money that cannot be put to work elsewhere in the U.S. economy. It's essentially doing nothing to help the economy grow, whether he talked about loans, he talked about credit, et cetera, et cetera. I mean, isn't that a legitimate point? It's just sort of sitting there when it could be put to work for the American people.

No, I think this is one of the big misconceptions about what capital is. Capital is actually banks have it to protect against future losses. It's not a question of whether or not they can lend out more or less if they have more capital. In fact,

There are many, many academic studies out there from the Federal Reserve and elsewhere that show a clear correlation between two things, actually, between when banks have more capital, they actually make more loans.

And I think more importantly, when banks have more capital, they can make more loans and have better financial results through the economic cycle. So they're actually less volatile, which ultimately is good for the American people. Although you heard Baer, though, say that he says that there are formulas that show that if you raise bank capital requirements by a certain amount, there's, in his words, a diminution of GDP by a certain amount.

that's definitely what he and the largest banks want you to believe. The

The banking industry has spent an incredible amount of money trying to convince people of that. In fact, there were even Super Bowl ads last year trying to scare people into thinking that having the banks hold more capital was actually a bad thing. Really, it's just a bad thing for the banks themselves, for their executives.

for their shareholders. Um, because if a bank is holding more capital, they are, uh, they're not paying out as much in executive bonuses and paying out as much in dividends and other shareholder payouts. But, uh,

Banks that have a bigger safety cushion, that have a bigger reserve to protect against shocks and things that may go bad in the economy, more capital is actually a very good thing for the American people and for stability of the banking system. Okay, but Baer also pointed out something that you, in fact, had said earlier as well. There have been certain shocks in the intervening 17 years. I mean, he pointed to the pandemic, right?

And he said, look, that's like kind of a once in a lifetime kind of shock here. And the banks did fine. No way that they're undercapitalized.

Well, the banks did fine because the government put many programs in place. The Fed had programs, there was other fiscal spending. There was a lot of taxpayer money that was thrown into not just the banking system, but other parts of the financial system to protect us against a worse outcome during the pandemic.

Okay, Shaina, hang on for just a second. When we come back, I want to hear more of your responses to what Greg Baer said as a representative he is of the banking industry. And then let's talk about sort of what a better regime of stress tests in your mind would look like. So that's what we'll do in just a minute. This is On Point. This is On Point. I'm Meghna Chakrabarty. And before we get back to our discussion about the financial system and annual stress tests...

I can't resist the pun. I want to hear from you about another kind of stress.

It's the kind that I feel, and maybe you do too, when you're driving at night. Because car headlights are brighter than they have ever been before. They seem to be much brighter than they used to be. And in fact, OK, I'm not the only person who's thinking about this because it's recently been reported that the National Highway Traffic Safety Administration receives more consumer complaints about headlight brightness than any other topic.

So we want to hear from you. What is your experience like when you are driving at night? Have you noticed if car headlights have gotten brighter over time? How does it affect you when you're behind the wheel?

The wheel, you know, what do you think that they're not bright enough? We want to hear everything you have to say about headlights and brightness in American vehicles. So share your experience by recording a message in our On Point Vox Pop app. If you don't already have it, just go to wherever you get your apps and look for On Point Vox Pop. You can also leave us a voicemail at 617-353-0688.

So we're looking for any and all stories or experiences you have with car headlight brightness. And especially if you happen to be a person who spends a lot of time on the road, let us know. On Point, Vox Pop, that's where you should send us your thoughts. We're going to be talking about headlights later this week. Now, today we are talking with Shaina Oleschik. She is the director of banking policy at Better Markets. And we're talking about the banking industry's push or lawsuit to overhaul stress tests.

Shaina, so again, I want to hear your response to several of actually quite the concrete claims that Greg Baer of the Banking Policy Institute said a little bit earlier. He intimates that there is a lack of transparency in the modeling that the Fed does on these stress tests. And he actually says that instead of making banks stronger because of that, it actually makes it harder for them to effectively manage banks.

The capital, and that could make the stress tests themselves less effective. What are you thinking about that?

Well, I'm not quite sure where he's getting this sense that the stress tests are not transparent enough, because during the 2016 to 2019 period, the banks actually lobbied the Fed on this very point to make the stress test more transparent. And they actually were victorious.

Currently, anyone can go to the Fed's website, can learn what the parameters of the annual stress tests are, and can even find information about the models themselves. So I'm not quite sure what's behind his claim. I mean, short of seeing every calculation that's done,

You know, I think there's plenty of transparency, and especially in light of the fact that the stress tests are really, should be looking, or should be giving us a sense for how banks fare in light of a stressful situation in the economy. And we don't know, we don't have a crystal ball as to what is going to happen in the economy today.

tomorrow or next year. So I don't think that this...

Bringing even more transparency and handing over every single piece of the model, I don't think is consistent with a robust stress testing framework. But then if the banks can already see a lot of the calculations, let's put it that way, for these stress tests, why has the Fed itself, as we mentioned a little bit earlier, said that they're going to open a public comment period to see if there should be even more transparency in these stress tests?

Well, because the largest banks have been in their ear asking for more and more transparency. So, yeah, it's unfortunate. Lobbying is what you're saying. Exactly. And I would also mention that, you know, not only was the...

banking industry successful in getting a lot of this transparency in 2019. They were also successful in limiting the transparency that was shared with the public about their stress testing results. Prior to this, prior to 2019, the Fed also did what was called a qualitative part of the stress test, which was essentially giving the bank

feedback on their overall operations, you know, outside of the models and the technical results, giving more feedback

just qualitative results. And the banks lobbied to limit the transparency there. So now we don't get any sort of results like that that are shared. So this is really a self-interested push in my mind and a very creative look at, you know, what sort of transparency is good and what sort of transparency is not so good. Okay, here's another point that Greg Baer makes. And I'm actually going to...

elaborate on it from what the Bank Policy Institute, from literature they put out. You know, you heard him say earlier that he thinks the stress tests are calculating losses inaccurately. All right. So here's what the Bank Policy Institute says in their literature.

Quote, while the goal of the test is to project how much a bank's capital would be depleted under a severely adverse scenario, the Fed's models perform this task poorly. Each year, the stress test produces counterintuitive and sometimes even nonsensical results that are consistent with more granular, more accurate bank models. So they're internal models and recent market experiences. So he's they're basically saying the results are even wrong. So, like, why can we trust them?

Well, I think so taking a step back, you know, both banks and the Fed, I think are are responsible and should be held accountable for good modeling, doing the best they can to look ahead at what how banks might fare in a stressful scenario. So the Fed's

test results are really just the minimum. You know, banks still are responsible for doing their own tests if they have a particularly complex loan portfolio, for example, or a

particularly complex part of their operations, they absolutely are also supposed to be doing their own tests. So to be sort of blaming this volatility all on the Fed, I don't think is a fair characterization. You know, the banks, if they have some reason that they need even more capital, they should absolutely be having that. Mm-hmm. Okay.

So then there's this other issue that I told you we'd come back to later because you pointed it out. It's a – the Fed comes up with a scenario, a stress scenario. And on this, is it possible that you and the Bank Policy Institute actually agree? Because you can't – it's impossible to predict all the –

theoretically possible stresses that the economy could undergo. And so in that sense, aren't the stress tests just like shining a flashlight in one corner of a massive dark room?

Absolutely. And I think you're right. We've written in the past, and I think we still support having a more expansive set of scenarios. As I said earlier, in the last couple of years, the Fed has introduced what they're calling exploratory scenarios. And we think that those should be

developed further. The one key point that we've brought up where we might disagree with the Bank Policy Institute is making the results of those exploratory scenarios or a more expanded set of stress characteristics

Making those making the banks also be responsible for having capital to protect against those. You know, this is not just a theoretical game. This is real, real things that might happen. And the banks should be held accountable to protect against those. You know, Shane, I should have asked you this earlier. And forgive me that I didn't, because, you know, when we were talking about the

The industries claim that they're being forced to overcapitalize because of these stress tests. Let's just say theoretically that they got the overhaul that they wanted and their capital required capital reserve levels were to be reduced. What would they do with the excess capital now? What do they want? I guess I'm saying why do they want this? Because there's something they want to do with that capital.

Right. As I said earlier, there's two main things that they want to do with it. They want to increase their bonuses that they're paying to executives and they want to be able to increase their their dividends and shareholder payouts. Is it really just that they don't want to actually use them to create new products that could actually, you know, help build the economy? They would love you to believe that. I don't believe that.

Okay. So I want to take a step back here for a second. You know, when I first read about this lawsuit at the end of last year, at the end of December, it was –

Utterly fascinating to me because I think understanding the financial system is very, very important in this country. But I also noticed that in the U.S., the financial media, the financial press was very, very, very focused on this story for a few days. Like all these reporters that I have a lot of respect for saying this is big, this is big, this is big.

Outside the financial press, there was almost no coverage of this whatsoever. So with that in mind, I mean, Shane, I'm just thinking about all the listeners hearing this right now. I mean, why should they care about the future of stress tests for the nation's biggest bank? Like, what does it matter to them? How could what impact could it have on them if the stress testing regime were changed?

Yeah, so I think it's important to remember that

This is not, to me, loving economics. This is interesting to me, but this goes far beyond a theoretical banking economic calculation or something that's being done in Washington, D.C. This really does affect Main Street Americans. It affects people around the country,

We only need to look back a few years to the 2008 crisis to see that many of the many of the harms and the damages that were done to everyday people have continued for generations. As I was saying, someone that, for example, if a family member,

lost their job or lost their home that may have affected their children's ability to go to college, which has longstanding effects. So I think that the American people should expect that

their regulators and the people in Washington who are supposed to be protecting them are actually doing that and are appropriately, have the interests of Main Street Americans

in the forefront of their mind, not just what the big banks and the Wall Street lobbyists with a bunch of money are saying. You know, it's interesting because the fact that the American people didn't receive any kind of

analogous bailout as the banks did in 08. We've talked to a lot of political scientists who say like that is one of the major recent historical events that they say produced this spasm of dislike and distrust in the government that partially led to, you know, the rise of Donald Trump.

There's another Trump administration right now. I mean, do you have any sense of what the current Trump administration and, I mean, Jerome Powell is still at the Fed, but could there be more sort of pro-banking actions coming out of this administration? Yeah.

Absolutely. And I think that's important to remember because those often come at the detriment of the American people. You know, we only need to look back at some recent speeches from the Fed Board of Governors, for example. And many of the people that are on the Board of Governors are supporting some of these speeches.

some of these same points that the Bank Policy Institute brought up. So I think that this conversation is definitely not over. And it's important for people to have a voice and to stand up for what they think is right. And just to be clear, when you mentioned the greater transparencies that the banks lobbied for beforehand, that happened in the first Trump administration, right?

Correct. Yeah. OK, we've got about just like two minutes left here, Shaina. What would a better stress testing regime look like to you? So I think there's there's a few things that I would suggest. First of all, certainly broadening the test scenarios, as we talked about earlier. I mean, to it.

It makes sense to test against one set of scenarios, but as we know, there's a lot of dynamism in the US economy. Things change quickly. Being able to see how banks respond to a multitude of stress scenarios, I think, would really make the entire testing system more robust.

Bringing back that qualitative feedback would be another important change. You know, being able to share not just

mathematically how a bank responds to a specific stress scenario. But hearing from the Federal Reserve on on the resilience of each of the largest banks, I think both of those developments would would certainly strengthen the entire regime. OK, and then last, just quickly, if if you'd want the test to have a higher threshold, not the bailout threshold, but a higher one, what would that threshold be?

Well, so again, the stress tests themselves give the minimum amount of capital that a bank would need to have. So by having a more stressful scenario itself, it's not about a specific number for all banks. It's about having a more stressful scenario that puts more pressure on the banks to

So I don't think it's good to focus on a specific numerical number because that's not going to be the same for every bank. Okay, so just to be clear, but the idea is though that it's not a scenario in which one of the possible outcomes is, well, you get bailed out anyway.

Correct. Yes, that would be a huge improvement. Okay. Well, Shaina Oleschik, Director of Banking Policy at Better Markets, they're an organization that focuses on the financial system, have often been called a Wall Street watchdog. Thank you so much, Shaina, for educating us on the latest in the financial system's required stress test. I really appreciate it. Thanks for having me. I'm Meghna Chakrabarty. This is On Point. On Point.