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Maybe Banks Could Opt Out Of Stress Tests The Way Bankers’ Kids Opt Out Of Standardized Tests

Or "How Banks Learned To Stop Stressing And Sue The Fed."
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By David Sifry (DSCN0991.JPG) [CC BY 2.0], via Wikimedia Commons

By David Sifry (DSCN0991.JPG) [CC BY 2.0], via Wikimedia Commons

You know what banks really don’t like? Stress tests. Not only do they seem arbitrary and capricious, not only do they force them to fill entire floors of expensive Manhattan real estate with stacks of $100 billions that they’d really prefer to mail to shareholders, but they also occasionally fail them, or at least fail to pass them with anything like flying colors.

Brian Moynihan knows what we’re talking about.

Suffice it to say, no one on Wall Street would shed a tear were the stress tests to go away forever, or at least become easier to cheat on. One way to potentially make one of those things happen would be to sue the Fed. This, admittedly, is a fairly drastic option given that, as one of the people mulling this option says, whatever happens, the Fed will continue regulating the very same banks “every minute of every day of every week,” and could easily make those minutes and days and weeks exceedingly unpleasant, stress tests or no. Still, in demanding that banks take whatever steps necessary to remain solvent during a financial hurricane, the Fed may have pushed them too far.

The discussions are at an early stage and big banks are divided over whether the talks should continue, the people familiar with the matter said. Over the past several months, industry advisers and representatives from some big U.S. banks have been involved in several calls discussing the possibilities, with the latest occurring a few weeks ago, the people said….

In considering a legal challenge, banking groups have discussed an argument that would center on the opacity concern: that the Fed is violating the Administrative Procedure Act by not allowing meaningful public input into the tests, according to the people familiar with the talks.

Bank Groups Weigh Legal Challenge to Fed Stress Tests [WSJ]


Citi Will Try The Stress Test Again With A $9bn Stock Buyback

More stress tests, bleargh. I guess the news is that Citi "failed", though I can't get all that excited by that because it didn't exactly "fail" in the sense of now it's being forced to raise capital / broken up / burned to the ground. Instead it failed assuming it follows the capital plan it submitted to the Fed, which is clearly a capital-lowering rather than capital-raising plan. I ballpark it at $10bn of share repurchases and dividends,* which is ... well, it's pretty big for Citi. So they can just not do that then. Or not do quite as much of that, which seems to be their plan: In light of the Federal Reserve’s actions, Citi will submit a revised Capital Plan to the Federal Reserve later this year, as required by the applicable regulations. The Federal Reserve advised Citi that it has no objection to our continuing the existing dividend levels on our preferred stock and our common stock, and we plan to do so, subject to approval by the Board of Directors each quarter. The Federal Reserve also advised that it has no objection to Citi redeeming certain series of outstanding trust preferred securities, as Citi proposed in its Capital Plan. We plan to engage further with the Federal Reserve to understand their new stress loss models. We strongly encourage the public release of these models and the associated benchmarks and assumptions. We believe greater transparency in this process will best serve all banking institutions and their shareholders as well as the international regulatory community and market participants, and will encourage a level playing field globally. There are at least two ha! moments in that snotty last paragraph. First there's the fact that the Fed had planned to release the stress test results on Thursday and got gun-jumped by Jamie Dimon. So much for Fed transparency. But also, specifically, as people are all running around suing each other about the Fed maybe kind of encouraging bank CEOs to hide material information from investors, it is odd that the Fed would have the stress test results and sit on them for two days. Imagine the scenario where Jamie Dimon, Vikram Pandit, and the Fed all know that JPM passed and was going to do a largeish buyback, while Citi failed and was going to do a ... I guess somewhat smaller buyback - and they didn't tell anyone from today until Thursday. If you sold JPM to buy C today, wouldn't you be kind of annoyed?**

By Ryan McGilchrist [CC BY-SA 2.0 ], via Wikimedia Commons

New For 2019: No-Stress Stress Tests

Even Deutsche Bank won’t have to cram for this one.

michael barr

Top Bank Regulator Promises More Stress, Less Merging

Michael Barr’s also gonna have a real close look at those living wills.


Brian Moynihan Isn't Saying That It Sucks To Be A Banker Right Now, But He's Not Saying It's Great Either

If BriMo has said it once, he's said it a hundred times: Banking is hard, you guys.

Banks Prove That They Are Not Too Big To Fail By Saying "We Can Fail" On A Piece Of Paper, Moving On

One way you could spend this slow week is reading the "living wills" submitted by a bunch of banks telling regulators how to wind them up if they go under. Don't, though: they're about the most boring and least informative things imaginable and I am angry that I read them.* Here for instance is how JPMorgan would wind itself up if left to its own devices**: (1) It would just file for bankruptcy and stiff its non-deposit creditors (at the holding company and then, if necessary, at the bank). (2) If after stiffing its non-deposit creditors it didn't have enough money to pay its depositors it would sell its highly attractive businesses in a competitive sale to willing buyers who would pay top dollar. This seems wrong, no? And not just in the sense of "in my opinion that would be sort of difficult, what with people freaking out about JPMorgan going bankrupt and its highly attractive businesses having landing it in, um, bankruptcy." It's wrong in the sense that it's the opposite of having a plan for dealing with banks being "too big to fail": it's premised on an assumption that the bank is not too big to fail. If JPMorgan runs into trouble that it can't get out of without taxpayer support, it'll just file for bankruptcy like anybody else. Depositors will be repaid (if they're under FDIC limits); non-depositor creditors will be screwed just like they would be on a failure of Second Community Bank of Kenosha.


Goldman Ran Its Own Stress Tests On Its Mortgages And They Did Great

The Elect have their own special math and don't know what the Fed is talking about.