It is always big news when banks fail; passing grades on recent stress tests lack the panache. It is worth note, particularly considering the banking mess ten years ago.
As a mandate of Dodd-Frank, banks must analyze their balance sheets to assess how they will fare under various economic scenarios. Investopedia defines the stress test in the following manner:
- A bank stress test is an analysis conducted under hypothetical unfavorable economic scenarios, such as a deep recession or financial market crisis, designed to determine whether a bank has enough capital to withstand the impact of adverse economic developments. In the United States, banks with $50 billion or more in assets are required to undergo internal stress tests conducted by their own risk management teams as well as by the Federal Reserve.
That is a pretty big order. The good news this quarter is that large banks survived the test. As the WSJ says in headlines:
- Big Banks Ace First Round of Federal Reserve’s Stress Tests
- Fed says largest banks could continue to lend in a severe economic downturn
With the Great Recession in the rear-view mirror, that is good news for all.
- The positive scorecard signals the banks—including JPMorgan Chase & Co., Bank of America Corp., Citigroup and Goldman Sachs Group Inc.—are likely to get a green-light to increase dividend payouts and buy back shares when the second round of test results are released next week.
- Under the Fed’s “severely adverse scenario,” the big banks would together lose $410 billion—an improvement from the $464 billion aggregate losses projected in last year’s worst-case hypothetical scenario for the same firms.
Best of all: the Good Housekeeping Seal of Approval by the Federal Reserve Bank:
- The nation’s largest and most complex banks have strong capital levels that would allow them to stay well above their minimum requirements after being tested against a severe hypothetical recession, according to the results of supervisory stress tests released Friday by the Federal Reserve Board.
Perhaps the slowdown in credit growth, reported in the current G-19 report, with revolving credit growing only $7 billion this year, up to $1.06 trillion is a good thing.
Nothing to stress about, for now.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group