The 31 biggest banks in the U.S. all passed the first phase of the Federal Reserve’s stress test. This is the first time since the tests have been conducted on banks with over $50 billion in assets that all of them stayed above capital requirements.
Banks have been building their capital reserves, based on tougher Fed requirements, to protect against any losses. Included among the firms that did well are Wells Fargo (WFC), Citigroup (C), JPMorgan Chase (JPM), and Goldman Sachs (GS).
Based on the results thus far, the Federal Reserve said the big U.S. banks are healthy enough to keep lending if there were to be a serious recession, even if corporate debt markets failed, housing and stock prices dropped, and unemployment were to reach 10%.
Up next is phase two of the stress tests, which will assess which lenders can give capital back to investors. The banks will have to demonstrate that they can keep up the minimum capital levels even after stock buybacks or dividend payments were issued. The Fed is also expected to announce whether any of the banks will have to curb capital spending plans. They have, however, been told in private about whether their capital plans would place them under the Fed’s minimum threshold in the next phase of tests.
Santander and Deutsche Bank AG (DB), which is a first time-test taker, are likely to fail the next phase because of “qualitative” factors, sources tell The Wall Street Journal, which pointed out that strong capital levels by themselves are not enough to guarantee that banks will get payout approval. The Fed is also now looking at the banks’ governance, culture, and ability to determine risks.
Fed Stress Tests Find Banks Adequately Capitalized, The Wall Street Journal, March 5, 2015
All 31 top banks clear 1st phase of stress tests, USA Today, March 6, 2015
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