Banks Pass Last Stress Test Ever

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Author:: Owen Davis
Updated:: Jan 14, 2019
Original:: Jun 22, 2017

By Dan SmithRdsmith4 (Own work) [CC BY-SA 2.5], via Wikimedia Commons

Rejoice! Fed Stress Test Day is upon us! The day we get to learn which banks have all their ducks in a row and which will have to supplicate before the feet of the Great Yellen in order to regain their seat at the big boy table. This year's results are all the more consequential seeing as they're the last stress tests banks will ever have to face now that we live in Trump's America.

OK, that's an exaggeration. But if Steve Mnuchin's regulatory wishlist manages to turn into law, 2017's CCAR results are likely, at the very least, to be the last of the tough Obama-era variety. Which makes it all the more consequential that everyone passed:

Testings results released Thursday by the Federal Reserve show that the 34 institutions under scrutiny have enough capital to make it through the two scenarios regulators posed — one akin to the financial crisis and another entailing a shallower downturn.

Congrats, everyone! Isn't it nice when inconceivably complex regulatory matters can be conveyed in the same pass/not-pass grading system that college stoners rely on when they realize they've been too blitzed this semester to get anything better than a C-?

Anyway, tune back in for next week's installment, in which we learn who gets to shovel capital back to their shareholders.

Big banks make it through stress tests, investors await cash release [CNBC]

Courtesy Federal Reserve.

Janet Yellen needs to solve the problem of knowledge.

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

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

By AKS.9955 (Own work) [CC BY-SA 4.0], via Wikimedia Commons

And why not? It’s not like they’ll need those capital buffers anymore, and there’s much to celebrate.

CryanJob

Pray for Cryan.

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?**