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."

Author:: Jon Shazar
Updated:: Jan 14, 2019
Original:: Sep 6, 2016

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]

News

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?**