3 Takeaways From the Fed’s Stress Test

The Fed stress test results are out and all 34 banks have shown remarkable resilience, as reported on Thursday. One of the most dreadful tests for the banks has shown better results this year. With better resilience scores, 34 of the biggest banks in US can now boast of better aversion to economic shocks. On Thursday, the Federal Reserve said that the banks have enough capital to sustain an economic downturn. The second part of the report will be released next week, suggesting the names of banks which may return capital to investors. Here are three things that happened with the stress test.

Fed's Stress Test

All 34 Banks Stay Strong

 

The Fed stress test is mandated by Dodd-Frank and is one of the most dreaded banking tests in the country. This annual test measures the banks’ capital and their ability to withstand an economic downturn. This year, all 34 banks performed well in test. Most banks comfortably passed the minimum threshold. However, Morgan Stanley is still the worst performer for the second year on a row when it comes to the measure of leverage. The entire Wall Street is moving ahead of the bank, which has lagged in major metrics. The bank had to address to its ‘material weakness’ last year where it has to pay capital to shareholders. The company spokesperson has not commented on the reports yet.

Less Stressful Stress Tests

 

The Dodd-Frank stress tests were established after the 2008 financial crisis to test banks’ capabilities to handle a distressful economic situation. The Dodd-Frank regulations have made lending terms stricter, avoiding overoptimistic lending from banks. The regulation could be scrapped off, at least in part, by Donald Trump. He is in the process of appointing a Banking Supervisor who could be taking care of the stress test. There has already been a clear bias towards making the tests less stress and letting banks with higher capitals avoid the test altogether. The test itself has become eased on quantitative measure, helping paint a fairer picture of the banks.

Happier Investors Next Week

 

As the second part of the test gets released next week, it would be important to note what investors get. As per analysts, investors could finally seek good returns after almost a decade of lackluster performance. The payouts could be higher this year and Wall Street analysts are already foreseeing happier investors.

This year, the fictional scenario of the stress test accounted loss of 35 percent in real estate and a 10 percent employment rate. Testing banks against such extreme economic scenarios could be key to avoiding economic distress and making policies if such an event occurs.