The Economist: America’s banks sail through the Fed’s annual stress tests

The Economist, July 1, 2019: America’s banks sail through the Fed’s annual stress tests

Each year since 2011, the Federal Reserve has set “stress tests” for the banks. They must show how much capital they have, the quality of that capital and what activities they are up to. The Fed uses this evidence to determine whether an adverse shock—economic, financial or otherwise—might put too large a dent in that capital. The tests are one feature of the post-crisis Dodd-Frank financial-reform act, and they aim to ensure that lenders have enough equity on hand should catastrophe strike again. Failure to measure up can result in the Fed curtailing a bank’s ability to distribute cash to shareholders, in the form of dividends or share buybacks.

On June 21st the Fed announced that America’s banks passed this year’s tests with flying colours. That paves the way for bumper payouts to shareholders. The four largest retail banks, JPMorgan Chase, Bank of America, Wells Fargo and Citigroup, plus the two biggest investment banks, Goldman Sachs and Morgan Stanley, purchased $93.1bn-worth of their own stock in 2018. That will rise to $117.9bn in 2019. Most banks have also raised their planned distribution of dividends by more than 10%. On June 27th the Fed approved these capital plans for America’s 18 largest banks (though their approval for Credit Suisse is conditional on the bank addressing what the regulator regarded as weaknesses in its plans for share repurchases and dividends).

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