Questioner: I have two questions. The first is about the stress test. How do you think that will influence regulatory trends going forward? Now, I know the government said this was sort of a one-time public thing. But just going forward in a private sort of way, how do you think it will affect the regulatory trends for banks?
Kashkari: Let me give some context. I'll answer your question. I want to give some context for everyone else here. So, the regulators and Treasury undertook a stress test, which I talked about, for the 19 largest banks. There are already-existing capital standards for banks that are established, and that have been established for a long time. And what Treasury and the Fed did this time, is they said, "Let's look at these biggest banks, these systemic banks, and look out over the next two years and say, if we forecast a more severe economic scenario than people expect today, will the banks have enough capital? And will they have the right kind of capital to be able to continue lending through that more severe scenario?" But they were very careful to say that they're not creating a new capital standard. So, while they're not going to change how much capital a bank needs to hold three years from now, or five years from now, I think that they've learned a lot about trying to apply a consistent view across institutions.
Typically, what happens is, a regulator looks at, with company management, an individual institution, looks at their loan portfolio, looks at their business, and takes a fairly narrow view of, is that institution sound?
What this stress test has done is given the regulators a broader perspective to say, "Is this institution sound? How does it compare to other institutions? What's happening in the broader financial landscape?" So, what I've heard from the regulators -- I was not a regulator -- was, they've learned a lot from this, and it's been a very valuable experience. And that they're going to incorporate elements of this into their more normal supervisory work going forward. Did I answer your question?
Questioner: Yeah, but could you make it more forward-looking...
Kashkari: I think to make it more forward-looking, and to apply more consistency across institutions. You know, they're not only looking at what's in a bank's portfolio -- securities, loans. They're looking at the earning power of the individual institution. They're looking at different macro effects.
Questioner: And the second question I had was, as you said, banks that received TARP funds were strong banks. What do you think the government will do when a strong bank gets into trouble? Is it likely then that they would have access to more government capital because they've been deemed a strong bank?
Kashkari: I think it depends on whether a bank is deemed systemic or not. We segmented the world into two camps. Healthy banks, who we wanted to make even healthier so they could support lending, and systemic banks. If you have a bank that is neither healthy nor systemic, then we have something called "receivership," where the FDIC comes in and winds down the bank and sells it. So, I think it really depends on the situation.
The other thing to consider is, when we've had to intervene on individual institutions, the context of the financial markets and the context of the economy are very important. So, look at Bear Stearns. If Bear Stearns had happened, instead of March 2008, in March 2005, when markets were normal and healthy, we may have reached a different conclusion. Maybe -- I'm speculating -- maybe we would have concluded Bear Stearns is not systemic in 2005. But given the fragility of our capital markets, we felt that we had to take the action that we took. So, it's a complex answer to say that we look at each case individually in the context of what's happening around at the time.
Questioner: So, it's not a reluctance to lose the TARP money that's already been invested?
Kashkari: Well, I don't think that -- we established a standard, the healthy bank standard, where we said, "We want to evaluate whether or not a bank is deemed viable, before we put any government money in." We didn't want to put money into banks that ultimately were going to fail, if we could avoid it. Now, we've invested in almost 600 banks. I can't imagine we were perfect. I also don't believe that putting good money after bad is a good idea, if the bank is deemed not systemic.
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