Bank Stress Test Perspective from Former Fed Governor Krozner

SUSIE GHARIB: Policymakers made no change in interest rates. Wrapping up a meeting in Washington, the Fed
said the economy is improving, but decided to keep its key short term rate
near 0. The Fed’s policy statement said the economy has been “expanding

Policymakers also noted that the “labor market is improving” and
unemployment has “declined notably.” Consumer spending and business
investments are up, and while “oil and gasoline prices will push up
inflation,” the Fed believes it will be only temporary.

But the Fed also pointed to some potential problems. While it said
“strains on the global financial markets are easing,” it acknowledged they
still pose a threat to the recovery. And as for housing market, it remains

For more analysis on the Fed and those bank stress test results, we’re
happy to have with us Randall Kroszner. He’s a former Fed governor, and
now a professor of economics at the University of Chicago Booth School of
Business. And Randy, so nice to have you on our program tonight.

SCHOOL OF BUSINESS: Great to be on, Susie.

GHARIB: Let me begin about those bank stress tests. For the average
American who has been living through this whole financial crisis, can they
now say we don’t have to worry about the banks any more, this financial
crisis for the banking system is over?

KROSZNER: Well, certainly given my years on the Fed, from 2006 to
2009, I never say never about anything. But I think this is a very
positive sign that the banks have really built up their capital, they now
have stronger capital levels than when they went into the crisis in 2006 in
many cases. And they are able to undertake stresses that are even greater
than what we saw. So I think this is a good sign. But there’s still could be some
problems lurking out there.

GHARIB: Well, you know, some bank regulators have been calling for
even tougher regulations on the banks. Do you think banks need to do more
to be even safer?

KROSZNER: Well, I think it’s very important to really improve risk
management, that’s one of the things that was astonishingly poor during the
crisis and into the crisis. I think there have been important improvement there, there’s a lot
more that can be done, but we made a lot of headway with respect to
capital, and we’re making a lot of headway on a number of other aspects of
banking stability.

GHARIB: Well, now that the banks are more stable and they are
stronger, should we expect them to be lending more money, making more loans
to businesses and individuals, and helping the economy?

KROSZNER: I think is going to make the banks feel more comfortable in
being able to make those loans. And I also think it’s going to be helpful
to make people feel more comfortable that start to borrow. One of the reasons that the banks haven’t been lending is because
there haven’t been that many people who wanted to borrow, because of the
uncertainty in the economy. Part of the uncertainty was the potential
instability of the banking system. If people feel that the banks are more stable, both the banks are
going to be able to be more comfortable lending more, and more people are
going to want to borrow to invest and hire.

GHARIB: Randy, let’s turn to the Fed policy meeting today, and no
change on interest rates. Do you think the Fed did the right thing? You
were Fed governor for many years. If you were sitting around the table, is
that how you would vote?

KROSZNER: Yes. I don’t think there was any reason to change the
policy right now. They still have a lot of accommodation, a lot of support
for the economy, because the economy, although we’ve gotten some good
signs, things turning around. We’ve had a few false dawns before in early
2010, early 2011, where the employment situation seemed to be improving,
and then we got very disappointing numbers for subsequent months. So I think it’s right for the Fed to be kind of taking a wait-and-see
attitude right now.

GHARIB: So what happens next? A lot of people are saying the April
and June meetings of the Fed could be critical. What’s your prediction?

KROSZNER: I think it’s really going to start to get interesting,
because we’ll get one more employment report between now and the next FOMC
meeting, which is in mid to late April. So we’ll get some information, but
not a lot of information. So my guess is the Fed will be still somewhat cautious in its outlook.
But by June we’re going to get a lot more information and we’ll get the
employment numbers for two more months. We’ll get GDP numbers. And so I think that’s the point where the Fed is really going to have
to make a decision, does it still need to continue this extraordinary
support or can it start to taper that off?

GHARIB: What do you think, in just a few words? More support or just
lay low?

KROSZNER: Well, I think it all depends on what is going to happen in
the data. I think if the economy continues to grow like this, I think
tapering off the support very gradually will be a reasonable way to go.

GHARIB: OK. We’ll have to leave it there. Hope to get you back in
the spring to talk more about all of this.


GHARIB: And we’ve been speaking with Randall Kroszner. He is
professor of economics at the University of Chicago Booth School of

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