Federal Reserve Gives All Banks a Pass in Annual Bank Stress Test

The Federal Reserve released its annual bank stress test after the market close Thursday. All 34 large banks tested remained well above their risk-based minimum capital requirements, and the Fed announced no restrictions relating to dividends and buybacks. With the dismal state of the economy through soaring inflation and record low consumer sentiment these tests were keenly watched. Banks suffered slightly more hypothetical losses in the 2022 severe test than last year, posting $612 billion in projected losses as capital ratios fell to 9.7%.

The stress tests help ensure that large banks can support the economy during economic downturns, estimating their losses, revenue, and capital levels under hypothetical scenarios. Banks are bound by their stress capital buffer (SCB) framework in terms of returning cash to shareholders. However, if they have excess capital, dividend and buyback increases are now allowed.


  • The 2022 stress test shows that large banks have sufficient capital to absorb more than $600 billion in losses and continue lending to households and businesses under stressful conditions.
  • In large part, this is due to the substantial buildup of capital since the 2007–09 financial crisis
  • All banks remain above minimum capital requirements in a hypothetical downturn despite the larger post-stress decline this year, the aggregate and individual bank post-stress CET1 capital ratios remain well above the required minimum levels throughout the projection horizon
  • 34 large US banks have strong capital levels, and could continue lending in an economic downturn
  • Under the severely adverse scenario, the aggregate common equity tier 1 (CET1) capital ratio falls from an actual 12.4 percent in the fourth quarter of 2021 to its minimum of 9.7 percent, before rising to 10.3 percent at the end of the projection horizon.
  • The 2.7 percentage point aggregate decline this year is slightly larger than the aggregate decline of 2.4 percentage points last year.

For shareholders, the extra cash that this implies is welcome news. But it is also reassuring to the market generally to hear confirmation that banks have sufficient capital. The housing crisis in 2008 exposed some systemic liquidity risks at the banks. It’s good that the Fed is now playing closer attention to capital levels. With recession talk from President Biden to Fed Chair Powell concern will be 2022 underperformance, damaged economic recovery, and decreased credit spending by consumers.

How The Banks Reacted after Coming Out of The Pandemic

A point of order for those trading the banking sector on these results the banks do not react entirely uniform on them. When the banks were first allowed to do buy backs and dividend Morgan Stanley’s (MS) response was probably the most notable, as it doubled its quarterly dividend to $0.70/share. MS also upped its share buyback authorization to $12 bln. Goldman Sachs (GS) upped its quarterly dividend to $2.00/share from $1.25/share. Others that announced dividend increases include BAC, BK, USB, PNC, TFC, and JPM.

A notable exception was Citigroup (C), which said that it expects dividends of at least $0.51/share (its current level) and that it plans to continue share repurchases. In fairness, unlike many others, Citi maintained its $0.51/share during the pandemic. It has been at that level since August 2019, so it’s understandable that the company did not raise it. Others not raising include COF and RF.

Source: Federal Reserve

From The Traders Community News Desk