"The result could be less effective stress tests." "We are concerned that releasing all details on the models would give banks an incentive to adjust their business practices in ways that change the results of the stress test without changing the risks faced by the firms," Fed Chair Janet Yellen told Congress in a letter on Friday. Congress codified the test into law the following year as part of a broader financial reform package, and the Fed came to see it as an important tool to ensure that banks not only maintain enough capital to withstand economic storms, but also run their businesses in ways that avoid operational calamities. The Fed first conducted stress tests in 2009 as a way to boost confidence in the financial system. She expects the typical big bank to be allowed to increase stock buybacks by 27 percent and dividends by 8 percent, for a combined capital payout of 95 percent of annual earnings, up from 84 percent last year. "That is a key part of the value case for a lot of these stocks."īanks going through the stress tests have roughly $150 billion more capital than they need, Morgan Stanley analyst Betsy Graseck estimates. Higher payouts "would be significant from a signaling standpoint" that regulators are easing up on capital requirements, said Steven Chubak, a bank analyst at Nomura Instinet. According to their estimates, the Fed could allow banks to distribute nearly as much capital to shareholders over the next year as they generate in profits, a benchmark not hit since before the 2008 crisis. Wall Street analysts said they will be parsing language the Fed uses in presenting the results for any signs that its approach is starting to soften.Īnalysts say they do not expect the Fed to announce any explicit changes to the stress test, but they do expect higher payouts. Trump has not yet made any appointments to the Fed, but Republicans have turned up pressure on the central bank to cut red tape and ease regulations. The results will be the first since Republican President Donald Trump took office. On Thursday, the Fed is scheduled to begin releasing results from its two-part annual stress test, which was adopted in response to the financial crisis, to gauge banks' ability to weather an economic storm that could threaten the stability of the system.
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