The Federal Reserve is expected to disclose Thursday how Bank of America, Wells Fargo and big banks would fare in a hypothetical economic downturn, when the regulator issues the results of its latest “stress tests.”
The annual exams, required under the 2010 Dodd-Frank financial overhaul law, measure whether bank holding companies with $50 billion or more in assets have enough capital to absorb losses and keep operating in periods of stress. The reviews are a key tool in the Fed’s efforts to prevent a repeat of the 2008 financial crisis and instill public confidence in the resiliency of the financial system.
Thursday’s results, expected to be released at 4:30 p.m., represent the first part of the two-part testing process. Much more will be at stake for investors when the results of part two are announced next Wednesday.
In Wednesday’s tests, the Fed will say whether it objects to banks’ proposed plans to return additional capital to shareholders, such as through buying back stock or boosting dividends.
This year, much focus is on Wells Fargo, as investors wait to see whether the San Francisco-based bank’s sales scandal that erupted in September could have an impact on its stress test results. On Sept. 8, Wells agreed to pay $185 million in fines to resolve allegations that its employees, striving to meet aggressive sales goals, opened millions of accounts that customers may not have authorized for years.
Investors are also watching for whether Wells Fargo’s problems with its “living will” might affect its stress test performance. Regulators require big banks to draft the wills to show how they would be dismantled in a failure without relying on taxpayer bailouts.
In December, federal regulators slapped Wells with sanctions for failing to fix deficiencies in its will – making Wells the first bank to have regulators impose penalties on it for living will shortcomings. In April, regulators announced that Wells had fixed the deficiencies.
Wells Fargo has never stumbled on the stress tests in the past, although Charlotte-based Bank of America and some other banks have.