Banks behaving badly: The stress tests show an all-too-cavalier sector

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The role of the biggest banks in American society was illustrated last week with the results of “stress tests.” The two agencies regulating them announced that five of the eight were not in shape to fail without putting the taxpayer on the hook again.

The role of the biggest banks in American society was illustrated last week with the results of “stress tests.” The two agencies regulating them announced that five of the eight were not in shape to fail without putting the taxpayer on the hook again.

The regulatory agencies were the Federal Reserve and Federal Deposit Insurance Corp. Of the eight banks in question, Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street and Wells Fargo failed the tests. Goldman Sachs and Morgan Stanley failed with one of the two agencies. Citigroup passed.

America’s economic crisis and resulting recession starting in 2008 were caused by irresponsible behavior by banks, playing games with high-risk mortgages against which they sold bonds. In the end, so-called “quantitative easing” employed by the Federal Reserve to keep the banks and the economy from sinking beneath the waves cost taxpayers an estimated $4.5 trillion.

The stress tests, or living wills, were required by the 2010 Dodd-Frank law, seeking to require big financial institutions like the eight banks to structure themselves in such a way that if they looked like they might fail again, they would not take the economy down with them. Nor would they require another enormous taxpayer bailout to prevent their behavior from sinking the economy again.

The results of the tests — five failing, two half-failing and only one shown to have taken the needed steps — indicate, first, that the big banks don’t pay much attention to the regulators. Second, they continue to take for granted that the federal government will continue to deem them too big to fail and will bail them out if their risky behavior puts their existence in question. Third, in spite of government efforts to protect the economy from them, they are clearly insisting they are free to continue to pursue their profit-making, in housing, auto, student and credit card loans, without respect to the country’s well-being.

The banks that failed the testing have until Oct. 1 to clean up their acts. Failure to do so should entail for them severe Fed and FDIC penalties, sticks instead of carrots. Or maybe they should just be broken up.

— Pittsburgh Post-Gazette