New For 2019: No-Stress Stress Tests

Even Deutsche Bank won’t have to cram for this one.
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By Ryan McGilchrist [CC BY-SA 2.0 ], via Wikimedia Commons

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

The midterms are over. Donald Trump is either a lame duck or two years from elected Greatest Most Beautiful and Perfect President of America for Life (and, taking a page from the leaders he most admires, maybe beyond). That means the time has come to get that regulatory bonfire going in earnest, while there’s still time, starting with making stress tests multiple choice. And we’re not talking LSAT problem-level multiple choice. We’re talking old-school Global Studies Regents exam level multiple choice.

Fed Vice Chairman of Supervision Randal Quarles in a Friday speech said the agency was considering revisions that could make the test scenarios more consistent from year to year and give firms their results before they wrap up shareholder-return plans… Banks will likely welcome what Mr. Quarles outlined as a sweetening of an April proposal that was already set to ease the stress-testing burden….

Mr. Quarles also recommended that financial institutions with less than $250 billion in assets, which include SunTrust Banks Inc. andFifth Third Bancorp , should skip the 2019 tests as they are set to enter a two-year evaluation schedule under a different Fed proposal.

Fed to Further Overhaul Stress-Testing Regime, Making it Easier for Banks to Pass [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?**