The Federal Reserve will release the results of an extra set of stress tests Friday that will determine if top banks can hike dividends and buy back shares again. Bank stocks mostly fell.
An earlier set of stress tests in June found that most banks were financially padded enough to withstand the impacts of the coronavirus pandemic.
Loan losses for the 34 banks tested came in anywhere from $560 billion to $700 billion under a new “sensitivity analysis” added to the tests to account for the economy’s contortions under the pandemic. Still, that analysis showed “that our banks can remain strong in the face of even the harshest shocks,” the Fed said in June.
But the Fed also ordered banks to cap dividends and suspend share repurchases throughout Q3 and Q4 to maintain financial buffers. Meanwhile, the economic collapse even forced Wells Fargo (WFC) to slash its dividend 80% this summer.
Since the last stress tests, banks have had to resubmit and update their capital plans later this year “to reflect current stresses” while the Fed conducted additional analyses as more economic and financial data rolled in.
But policymakers are more optimistic about the economy, raising their forecasts at the Fed meeting this week.
The central bank resisted some calls for easier policy and instead maintained the status quo, as the deployment of coronavirus vaccines looks to boost the economy next year.
Stress Test Scenarios
Shares of JPMorgan Chase (JPM) dipped 0.7% on the stock market today. Among other bank stocks, Bank of America (BAC) added 0.5%, while Citigroup (C) lost 1%. Goldman Sachs (GS) eased 0.8%, and rival Morgan Stanley (MS) slipped 1%. Wells Fargo fell 0.2%.
The additional stress tests looked at two coronavirus-induced scenarios. One was for a sharp but relatively short economic decline with the unemployment hitting 12.5% at the end of 2021 but improving rapidly afterward.
The other was for a less severe but longer slump, with the jobless rate worsening to 11% by the end of 2021 but declining more slowly.
Banks have been adding to their loan-loss provisions the year as they gird for economic fallout from the pandemic.
Meanwhile, their trading desks have been booming as market volatility boosts stock and bond transactions. Investment banking units have also seen a big year for IPOs with several big startups like Airbnb (ABNB) going public.
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