Business World

Sunday 19 January 2020

Fed stress-test results underscore financial recovery despite failures

JPMorgan Chase: released its glowing figures early. Photo: Reuters
JPMorgan Chase: released its glowing figures early. Photo: Reuters

Jonathan Stempel

MOST of the US's largest banks passed their annual stress test, according to the Federal Reserve, in a conservative report card that underscored the recovery of the financial sector but called out a few laggards, including Citigroup.

The Fed announced the results in an earlier-than-expected release. JPMorgan Chase pulled the trigger by announcing its own glowing marks before the Fed's release, and helped lift the stock market.

But the failing grade for Citigroup, the nation's third-largest bank, was a shock. Going into the tests some analysts felt it had a better chance of a positive surprise than its rivals.

The Fed said on Tuesday that 15 of the 19 banks tested would have enough capital, even if they suffered a financial shock that would see unemployment hit 13pc and housing prices drop 21pc.

The results paved the way for many of the passing banks to announce highly-anticipated plans to boost dividends and buy back stock.

The outcome showed a middle-of-the-road approach. The Fed failed enough banks to give the tests credibility and to elicit industry outcries about the tests being too tough, but it reassured markets that the US banking industry is generally healthy.

"Overall, we can't complain that these tests weren't rigorous enough, and it's good to know that most banks would at least survive another global financial meltdown," said Paul Ashworth, chief US economist at Capital Economics in Toronto.

MetLife, the largest life insurer in the US, was also among the four financial institutions that failed the exam, which applied worst-case stress scenarios projected through to the end of 2013. Ally Financial and SunTrust were also at the bottom of the heap.

The Fed uses the annual stress tests to give the markets a window into the health of the US banking industry, and also determine if individual banks are strong enough to reduce their capital buffers.

Bank of America, the nation's second-largest bank, passed the Fed's test, but it did not ask for a dividend increase or to buy back shares. Last year, the Fed rejected the bank's request for a dividend hike, in a major embarrassment for chief executive Brian Moynihan.

JPMorgan, in a surprise to markets, earlier announced that the Fed had given it permission to raise its dividend by 20pc and spend as much as $12bn (€9.2bn) buying back stock this year. The news helped the US stock market post its best day this year.

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