What's going on?

There�s been quite a bit of news about banks on both sides of the Atlantic in the past few days. It highlights how much better shape US banks are in than those in Europe � and how Europe�s banks could be a problem for everyone� �

What does this mean?

On Wednesday, almost all major US banks passed annual �stress tests� that the US Federal Reserve (�the Fed”) conducts. Basically, the Fed checks if banks hold enough of a cash buffer to survive a (hypothetical) economic crash. The only banks to fail were two American subsidiaries of foreign banks: Santander and Deutsche Bank.

On Thursday, Deutsche Bank (Germany�s largest bank) saw its stock price hit a 30-year low. Part of the reason was that it failed the Fed�s stress tests. Also, the supranational financial organization, the International Monetary Fund (IMF), called it the world�s riskiest big bank. It didn�t help that famed investor, George Soros, who has bet against Deutsche Bank�s stock and sees a financial crisis coming, said that the European banking system would be �severely tested� in the wake of the Brexit vote.

Why should I care?

The bigger picture: While US banks appear to be very safe, global investors are still concerned about�European banks. US banks are healthier partly because the US economy has recovered more quickly than the European one, and also because the US acted quickly to provide their banks with more cash in the wake of the 2008 financial crisis (through a program called�TARP). Europe�s banks, as evidenced by their share prices, are still struggling.

For the markets: Weak banks are a risk for global markets � even if they�re just in Europe. The world�s financial system is interdependent. If a European banking crisis were to emerge, it�s likely all markets will be affected (at least temporarily). It�s far from certain that one will happen, but Europe�s banks are certainly facing some fundamental challenges that need to be addressed.