The Federal Reserve declared plans for a fresh round of stress test on US banks. The banks include the six largest, to see if they could survive a possible market shock, taking the example of the European debt crisis. The global market shock tests for those banks will be generally based on price and rate movement that occurred in the latter half of 2008 coupled with the additional forces related to the impending crisis situation in Europe.

The six banks to undergo this exam are Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo. The heightened stress tests for those banks are part of a larger supervisory test the Fed will conduct on 19 firms’ capital plans. The Fed’s conclusion of those plans will determine whether the banks can raise dividends on repurchase stock. The banks must submit their capital plans by January 19, 2012.

The latest round of tests comes at a time in history when many are concerned about US banks exposure to the European debt crisis, which could throw that region into a recession and bring the financial markets to a standstill. Analysts opine that general people should read this as a positive sign as the US banking industry is really going to go under severe acts of pressure. Why positive, you may ask? The reason is even if a firm fails at this stage, basically what’s going to happen is the amount of capital they would return would be limited or shut off until they get to certain levels. Vice Chairman Janet Yellen hinted last week that the Fed would conduct the stress tests in coming weeks.

Federal Reserve has performed periodic stress tests on the 19 largest banks it supervises in the first half of 2009. Though some economists had opposed the feasibility and the processes of the test, other investors were reassured that the initial stress test had concluded the America’s biggest banks had the requisite resources to escape unscathed from the recession. 

It would be interesting to watch the developments from the US Stress Tests and the effects on the financial markets in the long run.