Starting from 2011, America's flagship banks have endured annual "stress tests" managed by the Federal Reserve, entailing a thorough inspection of their plans for doling out dividends and buying back shares. The offspring of the post-crisis Dodd-Frank act, the tests are designed to ensure that lenders have enough equity on hand should disaster strike once again. However, banks say they are onerous and challenging. And because failure can mean a block on payouts, the tests have spewed both caution and indignation.
Thus, it was most definitely a pleasant surprise when, for the first time in seven years, the Fed declared that it had approved the dividend and buy-back plans of all 34 banks tested this year. Even under a "severely adverse" scenario including a particularly grueling recession, all would keep basic capital ratios above the regulatory minimum.
Capital One Financial was the only bank asked by the Fed to address weaknesses found in its capital plan, which it must do within the next six months. Still, those fixes weren't enough to stop regulators from giving the Virginia-based firm its stamp of approval. American Express too squeezed through only after cutting back its planned payout (which banks may do after the first stage of tests).
This proclamation led to shares of large U.S. banks climbing higher in the premarket last Thursday. Morgan Stanley was up 2.7%
Federal Reserve Governor Jerome Powell welcomed the results of this year's stress test, saying it has "motivated all of the largest banks to achieve healthy capital levels and most to substantially improve their capital planning process."
This year the Fed excused 21 of the 34 banks from the "qualitative" part of its tests, which assess internal processes rather than numerical resistance to stress. In a recent report the Treasury pressed it to go further, suggesting among other things that the central bank be more open about its models and excuse more lenders from the qualitative exam. Powell sounded sympathetic when he spoke to senators on June 22nd, and it seems that the restrictions and reservations that so greatly characterized the banking world after the crisis are finally being let down.
Powell told Senate lawmakers last week if the country's largest banks continue to meet regulators expectations, it would be "appropriate" to remove the subjective aspect of the yearly test altogether. The Fed governor's suggestion comes amid more than 100 recommendations made by the Treasury Department to lessen the burden on banks, including limiting the number of financial firms that must face the annual exams.
While this news is mostly positive, it should not serve as an excuse for banks to completely let down their guard. All crises hit when people expect them the least, and that is also when banks are most vulnerable. Thus, while an easing of regulations is forecasted, it should not be one that is careless or without measure.