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Banks pass stress test but they’re not taking regulations seriously: Simon Johnson

Nicole Goodkind
Nicole Goodkind
Daily Ticker

Nearly all of the largest U.S. banks passed the Federal Reserve’s stress test, meaning they are prepared to withstand a severe recession or global downturn. Of the biggest 30 banks, only Zions Bancorp failed to meet the capital minimum required to survive a crisis.

“The largest banking institutions in the United States are collectively better positioned to continue to lend to households and businesses and to meet their financial commitments in an extremely severe economic downturn than they were five years ago,” the Fed said in a statement.

While it’s safe to say that banks are safer, they’re far from reformed says Simon Johnson, former chief economist of the IMF and a professor of entrepreneurship at MIT.

Yahoo Finance editor-in-chief Aaron Task sat down with Johnson at The Atlantic Economy Summit earlier this week (before the stress test results were announced) to discuss the state of U.S. banks.

Related: 'Banks need more capital - the good times won't last forever': Sheila Bair

“We need to keep moving the ball on this issue,” Johnson tells Task. “U.S. banks are supposed to produce a living will that shows how they should be broken up. I think there are many [government] officials who are questioning whether this exercise is being taken seriously by the banks and whether the banks are capable of demonstrating that they could fail without any government involvement.”

It appears that the big banks have moved away with from 2008 crisis and subsequent LIBOR controversies relatively scot-free. No executives were jailed, bank stocks and profits are nearing all-time highs and compensation for bank CEOs are approaching 2007 levels.

Related: Americans hate big banks, but can’t quit them

“There was an idea in 2005-2006 that banks had moved to some sort of new level in terms of technology and a philosophical understanding of the risks of finance and nobody says that anymore,” says Johnson. “Now they’re regarded as being very big political players, bullies in their markets, and people who behave inappropriately when given the opportunity. So that’s how they’re seen today which is quite different.”

But does that lead to improved policy and tighter constraints? “That remains to be seen,” says Johnson.

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