For seven years, America’s biggest banks have undergone annual financial stress tests, with at least one bank failing to make the grade each cycle. That streak likely will end in the week ahead.
Financial reforms put in place after the near-collapse of the banking system during the Great Recession require the Federal Reserve to assess the ability of banks to survive tough economic times. The central bank tests the wherewithal of banks to withstand unemployment spiking to 10 percent, home prices falling more than 20 percent, commercial real estate dropping more than 30 percent and the Dow Jones plummeting 42 percent. Those are among the assumptions making up what’s called the stress test’s “severely adverse scenario.”
The results come in two phases, and the one directly impacting bank shareholders is due Wednesday. The Comprehensive Capital Analysis and Review is the report that decides if banks can increase dividends, buy back stock or buy a competitor. It’s estimated the banks subject to this examination have $150 billion waiting to be deployed, assuming they get a healthy checkup.
A buoyant financial sector has helped these 34 big banks become better suited to ride out an economic storm. But these annual report cards may become less stressful and less frequent.
