The nation’s largest bank holding companies continue to build their capital levels and improve their credit quality, strengthening their ability to lend to households and businesses during a severe recession, according to the results of supervisory stress tests announced by the Federal Reserve Board on Thursday.
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Banks may be sweating next year’s stress tests, in which they could be pushed to further broaden capital cushions by regulators, but the immediate hurdle for Wall Street firms and worldwide banks will come next week, when the Federal Reserve announces which institutions passed or failed the qualitative part of their exams.
All told the Fed found that the 33 bank holding companies measured would suffer a $385 billion loan loss total even in these extreme situations with unemployment jumping five percentage points and negative yields on U.S. Treasuries.
DFAST, short for the Dodd-Frank Act Stress Test, is part of the sweeping financial reform law passed in the wake of the 2007-2009 financial crisis.
Still, the banks’ stress test headaches may be back with a vengeance next year.
It also measured their exposure to other banks equally hit by an economic crash. Banks have been raising capital to make sure they can survive a blow like that, says Ernie Patrikis, partner at law firm White & Case.
The results of the tests are created to give investors and consumers an idea of how the financial system would hold up to different levels of economic strain.
Past year was the first time every participant cleared the Dodd-Frank test without sinking below any minimum capital thresholds. The Federal Reserve’s instructions for the 2016 stress tests required institutions to incorporate any proposed business plan changes in their results.
Wall Street banks have enough cash on hand to keep the Fed happy – this year, at least. The tests look at how strong banks would be in an unforeseen crisis, with economies in freefall, stock markets dropping precipitously and market counterparties at risk of failure.
But by and large, they urged investors to remain calm and, in some cases, buy bank stocks on share price declines that don’t line up with reality.
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“Banks generally are doing pretty well on earnings, so there is capacity to increase their dividends”, said Matt Anderson, managing director at Trepp. So testing the largest USA financial institutions under negative interest rates is not outside the realm of possibilities. Failures are embarrassing, and the Fed allows banks to resubmit capital plans based on DFAST results to give them a second chance to pass. Under his watch, Bank of America’s tangible common equity has grown by $50 billion. For instance, Bank of America was given a green signal in DFAST test while the Federal Reserve asked the bank to submit a new capital plan under the CCAR phase, as it failed to address certain weaknesses in capital planning processes. Citigroup was one of the biggest beneficiaries, with its shares rising 4.2 percent to close at $44.46, and gaining another 2.9 percent in after-hours trading.
