Consultants And Experts Are Raking In Billions Of Dollars From Stress Test

Major banks are dishing out hundreds of millions of dollars each to consultants and experts to help them prepare for the Federal Reserve's annual stress test.

The annual stress test is designed to see how major banks operate under a series of hypothetical and extreme case scenarios. This year's parameters include a 10 percent unemployment rate and a stock market with a value slashed in half.

According to the Wall Street Journal, Citigroup Inc C alone paid $180 million to multiple firms after the major bank unexpectedly failed the 2014 stress test. The publication added that banks spent around $29 billion on consultants in 2015, with the bulk dedicated toward passing the stress test.

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Banks are eager to spend money to ensure they pass the stress test, otherwise they are limited in their ability to boost dividend payouts to shareholders and increase or initiate a share buyback program.

The banks need to quantify how much cash they would lose under the Fed's hypothetical scenarios. Naturally, doing so involves modeling the behavior of millions of assets, and each loan or investment has its own unique characteristic. And then there are the thousands of pages of documentation that the banks also need to submit.

Meanwhile, banks employ hundreds, if not thousands of workers to focus on the stress test. JPMorgan Chase & Co. JPM counted 550 people working solely on the stress test last year, with more than 2,000 other employees contributing indirectly.

So far, all 33 of the major banks taking part in the stress test received a passing grade from the Federal Reserve. The 33 banks collectively had loan losses of $385 billion under the hypothetical severe economic scenario.