Know thyself

22 June 2017 By Gina Chon, Antony Currie Follow @GinaChon

All 34 lenders and Wall Street firms cleared the Fed’s annual health hurdle. Next year’s checkup may be less strict on operational risk and other areas. If banks want to make aggressive payouts to investors, future stress tests may give the central bank less power to stop them.

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All 34 banks subject to the 2017 stress test surpassed the Federal Reserve’s minimum common equity Tier 1 capital ratio of 4.5 percent, according to results released on June 22. The banks had to show that they had enough capital to withstand a severely adverse scenario, including a global recession in which the U.S. unemployment rate roughly doubles to 10 percent. The Fed does not use the banks’ projections about dividend payments and the like in this round of the exam.

The lenders' plans for distributions and stock buybacks are included in the qualitative round of results, due to be released on June 28. That portion of the exam takes into account more subjective criteria, such as whether a bank has a grip on its operational risk, and certain banks have had their capital-return plans blocked in this round of the test in prior years. In a change this year, only 13 of the largest banks were subject to the qualitative portion of the test while 21 firms were exempt.

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