Big Banks Clear First Phase of Federal Reserve Stress Tests

Banks have complained that regulators have unduly required banks to pile on capital that they could use to lend to small business and homeowners. The required capital buildup has also squeezed the industry’s profits, which can cut into bankers’ pay and bonuses.

Thursday’s results are very likely a good harbinger for next week’s even more consequential test, when Fed officials will decide whether to approve the banks’ plans to pay dividends and repurchase shares.

Wall Street analysts expect that those payouts will increase this year — a big plum for investors who have gone through nearly a decade of lagging stock prices. Bank stocks, which rallied sharply in the wake of President Trump’s election victory, are for the most part off the highs they reached earlier in the year.

The Federal Reserve analyzes the banks’ soundness by running their actual loans and other assets through a series of scenarios that would lead to huge losses.

This year’s fictional challenges for 34 banks included unemployment of about 10 percent and commercial real estate losses of 35 percent.

The Fed governor overseeing this year’s tests is Jerome H. Powell, a Republican former private equity executive appointed by President Barack Obama in 2011.

Although the criteria for the stress tests are reviewed and approved by the entire Board of Governors, Mr. Powell has made it clear that some rules need to be adjusted now that the banks are well capitalized.

On Thursday, Mr. Powell testified before the Senate Banking Committee that for certain banks, the Fed should consider phasing out the qualitative portion of the test — which measures the less mathematical aspects of a bank’s business, like its internal controls and its capital planning process. The banks will undergo the qualitative aspect next week.

READ ---  Fastest-Melting Antarctic Glacier Calves Again - September 28, 2017

Document

Fed’s 2017 Bank Stress Test

America’s biggest banks breezed through the first phase of the annual test. Next week, the Fed will decide whether to approve plans to pay dividends and repurchase shares.



OPEN Document


Banks have complained that the qualitative aspect of the test is subject to the whims of individual regulators, allowing them to fail a certain bank just to set an example.

“As we consider the progress that has been achieved in improving the resiliency and resolvability of our banking industry, it is important for us to look for ways to reduce unnecessary burden,” Mr. Powell said in his prepared testimony.

The tone of Mr. Powell’s remarks is different from that of his predecessor, Daniel K. Tarrullo, who had overseen regulation for the Fed before stepping down in April.

On the eve of last year’s stress tests, Mr. Tarrullo publicly signaled the need for higher capital surcharges on the eight largest banks.

Looking ahead to future tests, banks have even more reason to feel relieved.

Treasury Secretary Steven T. Mnuchin, a former Goldman Sachs executive who used to run OneWest Bank, wants to limit the number of banks that must undergo the stress tests. The Treasury recommends that only banks with assets of $50 billion or more be subject to the exercise. Currently, banks with at least $10 billion are tested.

The Treasury also proposes doing away with the qualitative part of the stress test, which will be administered next week.

It also would require banks to submit their dividend plans every two years instead of every year.

Banking trade groups seized on the results Thursday as proof that the time had come to ease up on the tests. At the largest banks, overall capital levels have increased to $1.2 trillion, from about $500 billion in 2009.

“From this solid foundation, the focus should now turn to what can be done to help U.S. banks promote economic growth even further,” Rob Nichols, president of the American Bankers Association, said in a statement.

Senate Democrats warned that the Trump administration’s proposals would allow banks to more easily “game” the tests and hide their risks.

“These recommendations would make the watchdogs’ jobs harder and prevent them from spotting risks before they balloon out of control,” Senator Sherrod Brown of Ohio said in a statement.

Banks have dedicated entire staffs to prepare for the tests, which had become, in some cases, an annual referendum on a banking chief’s job performance.

But as the capital levels have steadily grown, the outcome of the tests for most banks has become less in doubt.

“The overall feel of it and the intensity of it has subsided significantly,” said Bill Hines, a portfolio manager focused on banks at Aberdeen Asset Management.

Continue reading the main story

Source