Bank stress tests have come round again – and almost all banks are fine.
Is this a surprise? What actually goes on in a stress test? Well basically, the FED pitches banks against hypothetical economic scenarios, seeing whether they’d stand up to them – which is really testing whether they have a sufficient cushion of capital in the case of “deep global recession”. So stress tests are an attempt to safeguard against another 2008 scenario. But now, a few years on from the crisis, the tests are more being used as a gateway for bank payouts. Of the 18 tested, only one failed – (Ally), and for the 17 that passed the tests will pave the way for increased dividends and share buybacks.
Interesting weaknesses showed up in the case of Goldman Sachs – which finished third from last.
Here’s the FT:
Goldman, normally renowned for its resilience, would suffer a $20bn loss in the depths of the hypothetical crisis and its ratio of core “tier one common equity” capital against risk-weighted assets would fall to 5.8 per cent, compared with a minimum requirement of 5 per cent, the Fed said.
..but the bank doesn’t think this will be much of a problem:
Howard Chen, bank analyst at Credit Suisse told the FT: “Importantly, we do not believe this negatively impacts our capital return assumptions.”
Aside from the test results themselves banks had another concern: whether other banks would jump the gun and announce plans for payouts to shareholders early, like JP Morgan did last year. Some called it a prisoner’s dilemma scenario – if one bank goes, they all do. But the Fed asked banks not to make public their plans before next week’s announcement.
Here’s the chart – also available here, amongst other details.
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