Thursday will be a big day for many US top banks, as the Federal Reserve plans to release the results of its financial stress tests.
The stress tests will be comprised of a variety of data as well as commentary regarding various top US banks, and as such, could result in far-reaching implications for shareholders and institutions. The stress test exercise will focus on how some of the 34 high-ranking banks would persevere through a theoretical market crash, while a second scenario would analyze whether or not the top 18 banks should be granted permission to follow through with their dividend plans.
Previously during the 2008 financial crisis, the Federal Reserve released a similar set of stress tests; however, they were spaced out in terms of release dates. This time around though, the Fed is planning on releasing the results of both exercises on the same day, as a means of implementing a new way of setting bank capital.
In addition to the two exercises, the Fed will also provide data on how a group of the top 33 US banks would behave in wake of three pandemic scenarios. The pandemic scenarios focus on the outcomes a V-shaped economic recovery, a U-shaped economic recovery, as well as a W-shaped outcome- which is essentially double-dipped.
However, contingent on the severity of the impending results, investors will most likely incorporate the new information into their forecasts, which could in turn set off a cascade in the market. Given the certain level of uncertainty that exists within the scenarios, The Fed is taking additional precautions so as to not publish individual bank’s results, but rather the results in aggregate.
With regards to dividends, many European banks have halted payment distributions whilst economies suffer through the pandemic. Conversely however, policymakers in the US have expressed the need for continued dividend payments. Although US policy makers are heavily lenient towards the continuation of payments, there is a possibility that the Fed may attempt to curtail that. The Fed did confirm that some of its decisions on payout policies will be contingent on the severity of the pandemic; thus, the Fed could essentially use its annual capital planning exercise as a tool to reduce the top 18 banks’ forthcoming payout plans.
Information for this briefing was found via Financial Times. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.