The white dudes over at the Federal Reserve have finished crunching the numbers from this year’s stress tests they insisted on administering, and they’ve got good news and bad news.

The Federal Reserve on Thursday said a prolonged economic downturn could saddle the nation’s biggest banks with up to $700 billion in losses on soured loans….

Banks, which will announce their dividend plans for next quarter as soon as Monday, won’t be able to make payouts that are greater than their average quarterly profit from the four most recent quarters.

The Fed also barred them from buying back shares in the third quarter.

But mostly good news, specifically: In spite of the worst economic crisis in almost a century, everyone passed!

The Fed said U.S. banks are strong enough to withstand the crisis…. The central bank didn’t break out the results of the coronavirus analyses for individual banks.

Of course, as always, the news is slightly less good for Wells Fargo.

Of the six biggest banks in the U.S., only Wells Fargo looks likely to be affected immediately. Its dividend payouts in the third quarter were set to hit 150% of its average earnings over the prior four quarters, according to estimates by Wolfe Research analyst Steven Chubak.

Some people think there’s a reason (almost) everyone aced the stress tests, specifically that there’s not enough stress in them, or seriousness on the part of the proctors.

Daniel Tarullo, who oversaw bank regulation at the Fed from 2009 until 2017, said Thursday’s moves “don’t really amount to much” and reflect a “substantial erosion” in the value of the annual tests. The Fed ought to have taken the time to recalibrate this year’s tests to reflect the actual coronavirus shock, rather than adding analysis that “apparently was not good enough to release on a bank-by-bank basis to the public,” but is nonetheless being used to inform bank capital policies during the third quarter.

Fed Stress Test Finds U.S. Banks Healthy Enough to Withstand the Coronavirus Crisis [WSJ]
Wells Fargo Gets Dinged, but Others Might Follow [WSJ]
Fed Has Made Little Progress Diversifying Leadership, Report Says [WSJ]

Related

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?**