Stress tests

Some of the 23 large banks that participated in last week’s stress tests will be better positioned to reward shareholders than others, since they padded their capital amid the pandemic. Still, all are expected to tread cautiously amid ongoing economic uncertainty.

Four companies — Regions Financial, MUFG Americas Holdings and the U.S. arms of the Royal Bank of Canada, BMO Financial— felt they had something to prove to the Federal Reserve after being assigned higher capital buffers than most of their peers last year. Will their decisions pay off for shareholders?

The Federal Reserve found that under its harshest stress-test scenario, bank capital ratios would decline to 10.6% on average — well above the 4.5% minimum requirement. Restrictions imposed on dividend payments and share repurchases during the economic crisis last year will be lifted after June 30.

The biggest U.S. banks, led by JPMorgan Chase and Bank of America, are expected to pay out $142 billion in capital to shareholders after clearing this year’s stress tests.

Nineteen of the nation's largest banks plus four smaller firms will be tested against baseline and severely adverse economic scenarios. The central bank will release details on their performance on June 24.

The White House directive may lead regulators to develop new mortgage underwriting standards, stress-test requirements and flood insurance policy, observers said.

Regulators around the world are exploring how to assess banks' exposures to climate change risks. But they'll have to tackle legal, economic and modeling problems that don’t have obvious solutions.

For banks that pass this year’s stress tests, the Federal Reserve said it will eliminate the restrictions on dividends and share buybacks while subjecting those institutions instead to the stress capital buffer.

A former Federal Reserve employee admitted to illegally taking documents, including bank stress test data, after deciding to leave the board, U.S. prosecutors said Friday.

Comerica, Regions and KeyCorp executives say their companies will proceed with caution despite the green light from the Federal Reserve to buy back stock in case they have to cover a surge in loan growth as the economy recovers.

The Federal Reserve imposed the restrictions after conducting supplemental stress tests tied to the pandemic. But Vice Chair of Supervision Randal Quarles says it is now clear banks would have had sufficient capital regardless.

The Alabama company is instead on the hunt for nonbank acquisition candidates as well as employees or clients it could lure away from regional banks that have announced merger deals recently, John Turner says.

Federal Reserve Gov. Lael Brainard said "scenario analysis" is distinct from traditional regulatory tools to assess capital strength, but can measure the long-term impact of weather events and the transition to a greener economy.

Nineteen of the nation's largest banks must show how they'd withstand pressures in the commercial real estate and corporate debt markets that would accompany a severe global recession.

Under the Federal Reserve’s loosened restrictions, big banks can buy back a limited amount of their stock starting next quarter, but only JPMorgan Chase has announced detailed plans to do so.

The Federal Reserve's “midcycle” assessment — conducted in light of the COVID-19 pandemic — said the path of the economic recovery is still uncertain even though the banks that were evaluated maintained adequate capital levels under hypothetical scenarios.

As with most things related to 2020, COVID-19 will be a deciding factor as the Federal Reserve considers whether banks are able to increase their dividends or resume share buybacks.

Executives from U.S. banks continue to play down near-term expectations, but they say customers are growing more confident ahead of the rollout of coronavirus vaccines, and that key commercial lending segments could drive an economic rebound.

Global regulators are considering a universal stress test for climate change that requires lenders to use a 30-year horizon, a difficult and speculative projection of the energy industry that could harm bank financials.

The proposed best practices would be modeled after federal servicing standards and be used to supervise nonbanks firms subject to state regimes.