Fed stress tests: All big banks clear bar for capital requirements
The largest U.S. banks have significantly bolstered their defenses against an economic downturn, and could continue lending even during a deep recession, the Federal Reserve said.
That signals that many of those institutions will win regulators’ approval next week to boost dividends to investors.
In the first part of the Fed’s annual “stress tests” released Thursday, some of the country’s biggest banks, such as J.P. Morgan Chase & Co. and Citigroup Inc., fared particularly well, with their capital ratios—a key measure of financial strength—increasing briskly from levels seen during last year’s drill and comfortably exceeding the level that the regulator views as a minimum.
A senior Fed official, in a conference call with reporters, noted the broad improvement banks had made in recent years, saying they entered this year’s exam with more capital and higher-quality loans. They also benefited as the heavy legal costs from their role in the financial crisis recede.
Next week, the Fed will release the second part of the tests, which include regulators’ decisions on whether to allow or block banks’ plans to return capital to shareholders through dividends or share buybacks.
Thursday’s results don’t necessarily predict the Fed’s verdict next week, since in the second round the Fed judges banks not just by their balance sheets, but by how officials assess banks’ risk-management practices.
Overall, the Fed calculated that 33 of the largest U.S. banks would have loan losses of $385 billion under a hypothetical scenario that envisions the U.S. unemployment rate more than doubling to 10%, the stock market losing half its value and financial markets becoming so topsy-turvy that short-term U.S. Treasury rates turn negative as investors pay the U.S. government to hold their money. Even with those big losses, they would still have enough capital to satisfy regulators, the Fed said.
This year’s exams were “arguably the most stressful stress tests yet,” said Moody’s Analytics Chief Economist Mark Zandi in a statement.
i would have thought capital requirements were the first thing your would “stress test”?
“Next week, the Fed will release the second part of the tests, which include regulators’ decisions on whether to allow or block banks’ plans to return capital to shareholders through dividends or share buybacks.”
the fed decides whether banks it doesnt own can pay dividends?? wtf..