U.S. banks expect a clean bill of health after Fed’s stress tests -Breaking
© Reuters. FILE PHOTO – An eagle flies above the facade of Washington’s U.S. Federal Reserve Building, July 31, 2013. REUTERS/Jonathan Ernst/File Photograph
By Pete Schroeder
WASHINGTON, (Reuters) – Large U.S. banks believe they will get a good report from the Federal Reserve this Week. This should allow them to release billions in capital excess to investors.
On Thursday, the central bank will publish results from its annual “stress test” of banks. These tests assess the amount capital that banks need to weather severe economic downturns.
This annual exercise was introduced after the financial crisis of 2007-2009. It is an integral part of banks’ capital planning. This determines how much cash the bank can return to shareholders as dividends or share buybacks.
Executives and analysts agree that lenders will be well placed for the 2022 exam, given the economic stress of the COVID-19 pandemic has subsided and the ability to navigate the exam better.
Analysts agree that “All must pass.” Barclays In a Thursday note, (LON) stated. We expect nearly all banks to increase their dividends this year as well as next.
In recent years, banks have done well on tests that included additional exams during economic chaos caused by the pandemic. The Fed estimated that banks could suffer losses of $474 billion combined in severe economic downturns, however, this would leave them with twice the capital requirements under Fed rules.
However, experts expect that this year’s exam will prove more challenging than in 2021. Bank buffers should also be higher.
Because the tests get harder because the real economy becomes stronger and banks also have shrunk the reserves they put aside to cover pandemic losses that did not occur. In this “severely unfavorable” Fed scenario, unemployment will rise by 5.75 percentage point, which is compared to 4 percentage points for 2021.
The bank’s performance will determine the amount of its “stress-capital buffer”, which is an additional cushion that the Fed provides banks in order to weather any possible economic downturn. This capital can be added to regulatory minimums to help support everyday business.
The buffer will be larger for larger losses.
Credit Suisse analysts expect that this buffer will average 3.3% in comparison to 3.2% last year.
They wrote that “There might be more stress but there should be enough excess capital to make this manageable.”
NO SURPRISES ARE EXPECTED
New York’s conference was hosted by top bank executives. Morgan Stanley (NYSE:) Last Week.
Given the situation we were faced with, it’s possible that our stress capital buffer will increase. It’s possible, and we are well placed to manage it.” Wells Fargo (NYSE:) & Co. chief financial officer Mike Santomassimo told investors and analysts.
Morgan Stanley Chief Executive James Gorman spoke at the event and said that he would be surprised if bank capital numbers are “meaningfully different.”
It is possible that this equanimity will not last. Because the Fed did not have a Vice Chair of Supervision after Randal Quarles’ departure last year, this year’s test was relatively simple.
Quarles, who was appointed to the post by Donald Trump, a Republican in U.S., simplified stress tests after industry concerns that they were opaque and subjective.
Many experts expect that the Fed will revisit these changes after Michael Barr (Democratic President Joe Biden’s nominee to succeed Quarles) is confirmed by Congress.
Barr could reinstate a requirement that banks pre-fund nine quarters expected dividend payments to their capital plans. Quarles had reduced the number of quarters Quarles required.
Quarles could undo the steps he took to make these tests more predictable. He provided more information on the Fed’s models, and eliminated the bank’s power to flunk lender’s subjective concerns like risk management problems.
Jaret Seiberg of Cowen Washington Research Group wrote that “we expect Biden’s Fed picks to work next year” to make the test more difficult.