The Federal Reserve, exercising sweeping new authority to ensure financial stability, will show how the capital of the 19 largest US banks might fare through a deep recession and a second housing crisis. It will use the results to dictate which of them can increase their dividends.
The US central bank has conducted increasingly detailed tests of bank capital planning with the goal of assuring banks can survive an economic storm without the taxpayer-funded bailouts that sparked a political backlash, following the 2008 financial crisis.
The Fed will release the results of the so-called stress tests on Thursday, it said in a statement yesterday in Washington. The tests will show results for revenues, capital ratios and profits or losses at each firm over a nine-quarter period. “The industry has a record amount of capital and much cleaner balance sheets than two years ago,” said Jason Goldberg, senior analyst at Barclays Capital Inc. in New York. The results “are going to show the banking industry is on solid ground.” In past stress tests, the 19 bank holding companies have boosted their tier one common capital levels to $759 billion in the fourth quarter of 2011, from $420 billion in the first quarter of 2009.
Bank shares have soared this year as investors bet a strengthening economy will help firms boost earnings, with the KBW Bank Index of 24 US lenders advancing 15 per cent. Concern that the nation’s banks may be damaged by Europe’s debt crisis helped drive down the index 25 per cent in 2011, its worst annual performance since 2008. The Fed yesterday said the increase in capital partly reflects the central bank’s “move to ensure the firms reduced or eliminated dividends to maintain safety and soundness.” The banks paid out 15 per cent of net income in common dividends in 2011, compared with 38 per cent in 2006, the Fed said.