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All the biggest US banks have passed the annual Federal Reserve test of whether they can withstand future economic and market crises, urging analysts to predict a sharp rise in dividends and stock buybacks.
The Fed said Friday that 22 banks, including JPMorgan Chase, Goldman Sachs and Bank of America, will lose more than $550 billion under a “terribly disadvantaged” scenario where unemployment rates surge to 10%.
However, they suffer from far less capital than they have in recent years and remain within the required regulatory standards.
The theoretical recession the Fed used to test bank resilience was less severe than last year. This scenario was designed before President Donald Trump took office, but comes as his administration pushes to ease financial regulations.
“Large banks are still well capitalized and are restoring to a variety of serious consequences,” said Michelle Bowman, vice-chairman of the Federal Reserve oversight.
The Fed’s “stress test” results are used to calculate the minimum level of capital the bank needs compared to risk-adjusted assets, providing a critical buffer to absorb losses.
Barclays analyst Jason Goldberg is projected based on this year’s results, with Goldman Sachs likely to be the biggest winner of any major US lender as its minimum capital level drops from 13.7% to 10.7%. Wells Fargo, M&T Bank and Morgan Stanley predicted that capital requirements would be reduced by 1 percentage point.
He added that this would likely result in most banks returning to shareholders via dividends and raising the amount of excess capital they would like to stock the buyback. “We expect stock repurchase (dollar) to increase by 12%. [the] There is a median bank value compared to previous year’s exams, and most banks are stable,” he said.
The bank is optimistic that the test will become even more kind after the Fed has responded to legal challenges by the main banking lobby group and then promised to overhaul the exercise. The central bank said earlier this year it planned to make the movement more transparent and reduce volatility by averaging test results over the past two years.
Banks will need to provide updates until Tuesday on new capital requirements expected. They frequently plan dividends and share buybacks after the Fed stress test.
The Fed will push the bank’s total capital ratio of 1 with this year’s stress test, and the main cushion against losses will be reduced by 1.8 percentage points. This has been lower than in recent years, and he said last year’s exercise is well below the 2.8 percentage points fall.
However, the Fed said it hopes to calculate the bank’s capital requirements based on the two-year averaging proposal, and has been finalized in the coming weeks. This increases capital hits to 2.3%. Bowman said the change was favorable “to address excessive volatility in stress test results and corresponding capital requirements.”
The lender whose capital has the biggest decline due to theoretical stress was Deutsche Bank’s US business, which had a hypothetical decline of more than 12 percentage points, based on the average results of the past two tests. The next biggest fall was in the US subsidiary of UBS in Switzerland and RBC in Canada. However, they all remained at more than twice the lowest level of a minimum of 4.5% throughout the exam.
In this year’s “terribly unfavorable” scenario, US GDP fell 7.8% over the year, unemployment rate rose 5.9% to 10%, and inflation slowed to 1.3%. Home prices fell 33%, while commercial property prices fell 30%.
This is one of the most extreme recessions in history, but it’s milder than what the Fed created last year. The theoretical market crash, with stock prices falling 50% and high-yield bonds selling rapidly, was less severe than last year’s exercise.
The Fed said the banks benefited from higher profitability. It added that it included low hypothetical losses from private equity after “adjusting the way these exposures are measured to fit more with the characteristics of these exposures.”
Following pressure from Trump to ease the regulatory burdens supporting growth and investment, the Fed has announced plans to remake many of the bank’s rules.
This week, the Fed and two other main banking watchdogs announced plans to reduce their enhanced supplemental leverage ratio.
