U.S. banks expect a clean bill of health after Fed's stress tests

Citizens Financial (Delaware)

20/06/2022 11:00

By Pete Schroeder
    WASHINGTON, June 20 (Reuters) - Large U.S. banks are
optimistic they will receive a clean bill of health from the
Federal Reserve this week, freeing them up to distribute
billions of dollars in excess capital to investors. 
    The central bank on Thursday will release the results of its
annual bank "stress tests" which assess how much capital banks
would need to withstand a severe economic downturn.  urn:newsml:reuters.com:*:nL1N2Y21NI
    The annual exercise, introduced following the 2007-2009
financial crisis, is integral to banks' capital planning,
dictating how much cash they can return to shareholders in the
form of dividends and share buybacks.
    Analysts and executives say lenders are well-positioned for
the 2022 test, as the economic stresses of the COVID-19 pandemic
fade and lenders become more adept at navigating the exam.   
    "All should pass," analysts at Barclays wrote in a note on
Thursday. "We also expect almost every bank involved to hike its
dividend this year and next." 
    Banks have performed well in tests in recent years, which
included supplemental exams introduced amid the pandemic-induced
economic turmoil. Last year, the Fed found banks would suffer a
combined $474 billion in losses in a severe downturn, but that
would still leave them with more than twice as much capital
required under Fed rules.
    Still, analysts expect this year's test to be tougher than
the 2021 exercise and for bank buffers to be slightly higher as
a result. 
    That's because the test gets harder as the real economy
grows stronger, while banks have also shrunk cushions they had
put aside for pandemic losses which did not materialize. This
year, the Fed's "severely adverse" scenario envisages the
unemployment rate jumping 5.75 percentage points, compared with
4 percentage points in 2021. 
    How well a bank performs dictates the size of its "stress
capital buffer" - an extra cushion of capital the Fed requires
for banks to weather the hypothetical economic downturn, on top
of regulatory minimums required to support daily business. 
    The larger the losses under the test, the larger the buffer.
    Credit Suisse analysts project on average that buffer will
be 3.3%, compared with 3.2% last year. 
    "There may be more stress, but there ought to be ample
excess capital to render this manageable," they wrote.
    
    NO SURPRISES EXPECTED
    Top bank executives struck a relaxed tone on the tests
during a New York conference hosted by Morgan Stanley  MS.N  
last week. 
    "It's possible our stress capital buffer goes up, given the
scenario that we had to deal with. And we're well positioned to
deal with it," Wells Fargo & Co.  WFC.N  chief financial officer
Mike Santomassimo told investors and analysts. 
    Speaking at the same event, Morgan Stanley chief executive
James Gorman said he'd be "surprised" if the bank's capital
numbers were "meaningfully different."
    That equanimity may not last. This year's test is relatively
straight-forward partly because the Fed has not had a Vice Chair
for Supervision since Randal Quarles stepped down last year. 
    Appointed by former U.S. President Donald Trump, a
Republican, Quarles streamlined the stress test process in
response to industry gripes that it was often opaque and
subjective. 
    Many analysts expect the Fed to revisit those changes once
Michael Barr, Democratic President Joe Biden's nominee to
replace Quarles, is confirmed by the Senate. 
    Barr could restore a requirement that banks must pre-fund
nine quarters of expected dividend payments as part of their
capital planning, which Quarles had trimmed to four quarters. 
    He could also undo steps Quarles took to make the tests more
predictable, such as providing more information about the Fed's
models and scrapping the central bank's ability to flunk lenders
on subjective concerns, such as risk management lapses.
    "We expect Biden's Fed picks will work next year to toughen"
the test, wrote Jaret Seiberg, an analyst with Cowen Washington
Research Group.

 (Reporting by Pete Schroeder; additional reporting by Elizabeth
Dilts Marshall; editing by Michelle Price and Deepa Babington)
 ((Pete.Schroeder@thomsonreuters.com; 202-310-5485;))