The Fed is testing susceptibility to counterparty credit risk in 2014. Just to, you know, be on the safe side. Nothing to worry about here. No problems are anticipated. Hey, look there, green shoots!
Lenders including JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) will have to show they can survive the demise of a trading partner or a plunge in value of high-risk business loans in the 2014 version of U.S. stress tests.
The scenarios for the annual tests, outlined by the Federal Reserve in a statement yesterday, reflect some of the most pressing threats seen by regulators as they gauge the ability of the U.S. financial system to withstand economic shocks. Bankers will have to show what would happen to the value of leveraged loans they hold, the impact of another housing bust and how they’d fare if a firm that owes them substantial sums collapses.
The test was designed in part to build resiliency against what some see as emerging asset bubbles, said a Fed official who spoke on a conference call with reporters. The counterparty failure test aims to prevent a repeat of the 2008 crisis, when distress at Lehman Brothers Holdings Inc. and American International Group Inc. threatened to destroy their biggest trading partners.
Of course, regular readers here know another way to spell “a plunge in value of high-risk business loans”. C-R-E-D-I-T-D-E-F-L-A-T-I-O-N.