The results of this year’s stress tests will be published on Thursday after the stock market closes in New York. Those who exist may distribute capital to the shareholders without restrictions.
Analysts don’t expect any big surprises. Barclays analyst Jason Goldberg believes that many US banks will be overcapitalized and, after passing the stress tests, could distribute more than 100 percent of their profits to their shareholders in the next twelve months. “We assume that all major banks will raise their dividends for the third quarter and increase their share buyback programs,” he wrote in an analysis.
The stress tests were introduced after the financial crisis in 2008 as a signal to the financial markets that the institutes can survive severe crises and continue to grant loans to companies and households. In the past few years, the Fed has gradually softened the tests and relieved smaller banks in particular of the bureaucratic burden.
Top jobs of the day
Find the best jobs now and
be notified by email.
–
–
–
The most important test consists of the comprehensive capital analysis, Comprehensive Capital Analysis and Review, or CCAR for short. This is where the Fed examines how banks manage their balance sheets and whether they are strong enough to pay dividends or buy back stocks.
Deutsche Bank results will not be published
In the case of foreign institutions that – like Deutsche Bank – have a holding company in the USA, the question is whether they are allowed to transfer capital to the parent company and whether they basically meet a number of requirements with regard to core capital and leverage ratios. In addition to the quantitative aspects, there are also qualitative requirements, including those for the bank’s risk management.
Since Deutsche Bank has passed the stress test for the past two years, it will no longer be made public this year whether the bank passes the test or not. The Fed introduced this as a new rule before the corona crisis. The US Federal Reserve, which is also an important bank regulator, now only talks directly with the banks when there are deficiencies to be remedied.
At the end of May, the Fed announced that it was not yet satisfied with the progress at Deutsche Bank in terms of risk management and compliance and had reprimanded the Frankfurt Institute according to information from the Handelsblatt. This would threaten the Deutsche Bank with sanctions, including large fines. Most recently, however, the focus was mainly on Credit Suisse after the Archegos family office caused a billion-dollar loss with risky stock bets.
Pandemic forced the test to be adjusted
The corona crisis forced the Fed to adjust the stress tests. The deep economic slump in spring 2020 was much more serious than the regulators had intended in their test. To ensure that the banks were adequately capitalized, the Fed halted share buybacks for several months. In December, a further and more stringent stress test was carried out, which the banks also passed. Some of the restrictions were therefore lifted again in the first quarter.
The US banks have benefited from a number of factors, including the fact that the Fed set interest rates back to zero right from the start and pumped trillions into the financial markets to resolve disruptions. It is still buying $ 120 billion a month in bonds as part of its ultra-easy monetary policy.
In addition, there was an unexpected boom in trading and trading jackets, which boosted income in investment banking vigorously. Bank stocks are already among the big winners.
Goldman Sachs’ paper rose around 35 percent this year. At JP Morgan Chase, it’s 20 percent. Analyst Golstein recommends, due to the upcoming capital distributions, to continue to bet on bank stocks.
However, Wall Street faces new difficulties. JP Morgan CEO Jamie Dimon warned last week at an industry conference that retail sales in the second quarter could have slumped by almost 40 percent year-on-year.
Since many companies stocked up on fresh capital at the beginning of the pandemic, the demand for fresh loans is also low. Dimon had already warned in his letter to shareholders in the spring of the great competition from tech companies and fintech start-ups, which could put a strain on the entire industry in the medium term. The big Wall Street houses present their results for the past quarter in the second half of July.
Results of the EU debit check expected at the end of July
And how are the European banks doing in the pandemic? The European Central Bank (ECB) and EU banking authority Eba are currently screening around 90 institutes as part of a stress test. Among other things, it is examined what consequences a deterioration in the economic framework conditions would have for the financial institutions.
Many banks have now sent data and scenario calculations to the supervisors, which are now being checked by the authorities. The results of the endurance test should then be published at the end of July. The stress test should originally have taken place in 2020, but was postponed by a year due to the corona crisis.
Because of the pandemic, the ECB asked the banks in March 2020 to forego dividends and share buybacks altogether. The supervisors wanted to ensure that the banks can continue to provide companies with loans and digest impending loan defaults due to the corona crisis.
As of this year, financial institutions that can afford it have again been allowed to distribute a small part of their profits. However, the amount distributed may not exceed 15 percent of the accumulated profits from 2019 and 2020, nor 0.2 percentage points of the Bank’s Common Equity Tier 1 capital. However, the supervisory authorities had given the prospect that from September 2021 distributions in the usual proportions will be possible again, “as long as the situation does not deteriorate extraordinarily”.
With the economy recovering, we are now getting closer to lifting dividend restrictions. “If the pace we predicted continues, sooner or later this recommendation could disappear,” said ECB Vice President Luis de Guindos on Wednesday at a financial event in Spain. The ECB is expected to make a decision on this on July 23.
The ECB is responsible for the supervision of the large banks in the euro area. It currently controls 114 institutes, including Deutsche Bank and Commerzbank.
More: Deutsche Bank cannot get rid of the shadows of the past
– .
