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Stress test rally: “Salivating over the prospect of higher dividend yields,” investors drove up the prices of U.S. bank stocks on Thursday on an otherwise down day for the stock market, the first trading day after the Federal Reserve approved the capital plans of 34 big banks. “The green light” from the Fed to allow the banks “to return loftier levels of capital led investors to put aside for the moment worries about the future direction of long-term interest rates or policy ructions in Washington, D.C..” the Wall Street Journal comments.

“The capital return tide has turned,” Morgan Stanley bank analyst Betsy Graseck said. “Yield investors will have to start paying more attention to bank stocks, expanding the investor base.”

One of the few banks to buck the rising tide and end the day lower was Capital One, whose capital plan was approved by the Fed, with changes needed by the end of the year. According to the Fed, the bank “did not appropriately take into account the potential impact of the risks in one of its most material businesses.”

“Credit cards and auto lending are the likely culprits,” the Journal’s Heard on the Street column said. “The stress tests found that under the most severe recession scenario, Capital One could see loss rates of 20% on cards and 8% on other consumer loans, totaling almost $26 billion.” If the bank doesn’t address that, “the shares could fall further.”

On the one hand, the passing grades the banks received from the Fed are a positive sign, the New York Times observes. “At least in theory, the more capital the banks now hold and less stringent oversight of the financial sector by Washington could give the economy a shot in the arm after years of caution,” it said. “On the other hand, critics fear the easing of regulatory pressure and a more laissez-faire-oriented White House could set the stage for a return to the bad old days of enormous leverage and freewheeling deals until the music inevitably stops.” American Banker looks at how the stress test results could spur mergers and acquisitions.

One of the biggest beneficiaries of the payout boost is Warren Buffett’s Berkshire Hathaway, which the Financial Times says stands to reap $1.6 billion in additional dividends, mainly from its stakes in Bank of America and Wells Fargo, where it’s the biggest shareholder.

As expected, Berkshire announced Friday morning that it is swapping $5 billion worth of Bank of America preferred shares to buy 700 million shares of common stock to take advantage of the bank’s higher dividend.

The rally in bank stocks is happening around the world, not just in America. The results of the Fed’s stress tests are certainly one factor, but so is good news from Italy’s troubled financial sector, “and the prospect of an earlier-than-expected end to easy-money policies that have long-depressed bank profits,” the Journal says.

“It’s a perfect storm for banks,” Vincent Deluard, global macro strategist at INTL FCStone Financial, said. “It’s a lot of good news happening in a very short amount of time in a very depressed sector that was under-owned.”

Wall Street Journal
Partners: Nearly three in four senior executives at middle-market companies say the require more capital during business disruptions, and rely on their banking relationships to provide it, according to a survey by Capital One Commercial Bank. “Having banks and financial partners that understand the company and industry will help lead some of the transformation,” said Dave Kucera, head of the financial institutions group at Capital One.

Treasury Secretary Steven Mnuchin.
Treasury Secretary Steven Mnuchin. Bloomberg News

You're fired: The Trump administration said it plans to cut off China’s Bank of Dandong from the American financial system, accusing it financing companies involved in North Korea’s weapons program. “We are committed to targeting North Korea’s external enablers and maximizing economic pressure on the regime until it ceases its nuclear and ballistic missile programs,” Treasury Secretary Steven Mnuchin said.

“Without regulators and cops in the corner, you will have incentives for banks to take excessive risks.” — Mark T. Williams, a former bank examiner at the Federal Reserve.

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