If the Fed finds that any of the 30 banks subject to the so-called
stress tests are still at risk, the banks will then have a few days
to change any plans they may have made to return capital to
shareholders through dividends or share buy-backs.
Most banks are expected to pass the exam, but analysts will closely
watch the results. Last year, American Express lowered its capital
distribution proposal after the first submission.
And banks may have been more willing to take risks with their
initial plans this year, now that they have been building up capital
in the years since the crisis.
"These banks are very well capitalized and I know they're going to
want to get more aggressive each incremental year in terms of what
they ask for," said Fred Cannon, global director of research for
Keefe, Bruyette and Woods.
The annual testing has become an increasingly important tool for
regulators to ensure that banks are not eating too much into their
capital cushions, by examining how banks would weather a
hypothetical major market shock.
Analysts said the biggest U.S. banks will probably meet the Fed's
requirements, having reduced their leverage, the amount of debt
compared to shareholder equity, since the 2007-2009 financial
Bigger fireworks could come next week, when the Fed will either
approve or reject each firm's plans to pay dividends to shareholders
or buy back shares.
The Fed conducts stress tests each year to measure how banks' loan
books and security portfolios would hold up under extreme economic
scenarios not unlike those experienced during the last crisis.
[to top of second column]
Thirty banks participated in this set of tests, up from 18 last
The first chunk of results is meant to show banks' relative strength
if each firm made the same capital moves. The Fed assumed each bank
would pay dividends equal to the average of the past four quarters,
and buy back no shares.
Last year, only Ally Financial failed to meet the minimum 5 percent
capital buffer in the first round of the tests.
In a new hurdle imposed this year, the biggest eight banks had to
consider what would happen to their business if their largest
trading counterparty were to default.
The Fed will make its own projections for bank balance sheets this
year, and banks may release results of their internal stress tests
if they disagree.
(Reporting by Emily Stephenson; editing by David Gregorio)
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