U.S. Banks Expect To Pass Fed's Stress Test

Large US banks are hopeful that the Federal Reserve will give them a clean bill of health this week, allowing them to disperse billions of dollars in extra cash to investors, Pete Schroeder and Elizabeth Dilts Marshall reported for Reuters.

Photo Insert: The Citigroup Tower in New York City

The findings of the central bank's annual bank "stress tests," which measure how much capital banks would need to endure a catastrophic economic slump, will be released on Thursday.

The yearly exercise, which was implemented in the aftermath of the 2007-2009 financial crisis, is critical to banks' capital planning since it dictates how much cash they may return to shareholders in the form of dividends and share buybacks.

Analysts and executives believe lenders will be well-prepared for the 2022 exam as the economic strains of the COVID-19 epidemic subside and lenders grow more competent at handling the exam. "All should pass," Barclays analysts said in a report on Thursday.

"We also expect almost every bank involved to hike its dividend this year and next."

Banks have scored well in recent assessments, which included extra exams implemented in the midst of the pandemic-induced economic upheaval. Last year, the Fed estimated that banks would lose $474 billion in a severe downturn, but that they would still have more than double the capital necessary under Fed standards.

Nonetheless, economists anticipate that this year's test will be more difficult than the one in 2021, and that bank reserves will be slightly greater as a result.

This is because the test becomes more difficult as the actual economy strengthens, while banks have also reduced the buffers they had set aside for pandemic losses that would not materialize.

The Fed's "severely adverse" scenario for this year predicts an increase in the unemployment rate of 5.75 percentage points, compared to 4 percentage points in 2021.

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