Financial markets will get an updated assessment of the balance-sheet strength of the largest U.S. banks on Wednesday when the Federal Reserve releases its most recent stress-test findings. The review covers 32 institutions, including household names such as JPMorgan and Bank of America, and is expected to be more muted than in some prior years.
In February the Fed said it would not use this year’s exam to alter the stress capital buffer - the extra layer of capital large firms must hold that moves with performance on the test. With those buffers standing pat, bank managements already have the regulatory inputs they need to finalize capital plans that may include stock buybacks or dividend adjustments.
Several analysts have signaled expectations for restrained capital returns. Raymond James analysts, in a note ahead of the Fed’s announcement, said they anticipate most banks will announce moderate dividend and buyback programs. They added that, despite an accommodating regulatory stance, some boards and executives may choose a conservative posture given prevailing uncertainties.
KBW analysts made a similar assessment about overall capital positions, noting that banks generally hold excess capital relative to implied pro forma target ratios and minimum requirements. That, KBW wrote, leaves the industry positioned to take advantage of changes in the regulatory environment.
Many firms appear likely to delay major capital redeployments until regulators complete a series of planned rulemakings. Industry-backed proposals under consideration - most notably a Basel-style revision to the risk-based capital framework - could free up material amounts of capital for distribution to shareholders or reinvestment in firms’ businesses, if implemented.
The Fed is also revising its stress testing process after years of industry criticism that the exams are opaque and at times subjective. Officials are still collecting public feedback on plans intended to make the tests more transparent. Given that process remains unfinished, the central bank opted to maintain capital requirements at last year’s levels for this round of results.
A Federal Reserve spokesperson declined to comment ahead of the results. The full stress-test release is scheduled for 4:00 p.m. ET (2000 GMT).
What to watch
- Whether firms announce immediate changes to dividends or buybacks in response to the published results.
- Signals from banks and analysts about how finalization of proposed capital rule changes might affect future capital-return decisions.
- Any commentary from the Fed about planned changes to the stress-testing methodology or timeline for adopting those changes.
The upcoming report is unlikely to produce the kind of dramatic shifts in capital rules or market reaction seen in certain past cycles. Instead, the assessment should provide a refreshed snapshot of capital adequacy across the largest U.S. banking firms while regulatory evolution continues in the background.