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Big Banks Pass Fed’s Latest Stress Test

Ace March 17, 2012 0

According to the Federal Reserve most big banks are in pretty good shape today.

Just last tuesday March 13, 2012 the large central bank said that more than half of the the largest financial firms have enough capital to withstand another recession. This has now paved the way for big banks to increase dividends and buy back shares.

The Federal Reserve ran a stress test on the big banks and most of the firms proved to be strong and resilient. Firms like Wells Fargo and JP Morgan Chase  have been cleaning up their books as the economy is improving. However even with this improvement other firms like Ally Financial and Citigroup remain shaky with bad mortgages and other bad business.

The stress test that the Feds used was done to see how the banks would survive under a weak economy. The looked to see if the banks would have enough capital to weather an unemployment rate of 13 percent, a 21 percent drop in housing and an unstable market. They also tested the banks against hypothetical economic issues in Europe and Asia.

According to Peter Eavis and J. B. Silver-Greenberg of The New York Times, “The Fed’s stress tests assumed that the 19 banks would be slammed with $534 billion of losses in just over two years. Even after such hits, most banks would emerge with adequate capital, the central bank said Tuesday. One measure of capital for the banks, which currently stands at 10.1 percent of assets, would fall to 6.3 percent in the Fed’s ugly projection.”

In other news, as of recent days, JPMorgan shares were up about 7 percent and stocks in both Bank of America and Goldman Sachs went up by 6 percent.

Also in the stress test the Fed projected, Citigroup’s capital would be as low as 4.9 percent of its assets and Ally financial along with SunTrust Banks would fare the worst.

If a bank was not to pass the stress test the Fed could potentially force them to raise more capital and postpone any plans for dividends. On the other side banks with good health can get the go ahead to increase dividend payments. This would show promising to shareholders who recently held poor stocks since the financial crisis.

So far JPMorgan Chase announced that it would raise quarterly dividend by 5 percent, a 30 cent increase, and buy back at least $15 billion of its stock until 2013.

With strong results in hand, JPMorgan Chase announced that it would raise its quarterly dividend by 5 cents, to 30 cents, and buy back at least $15 billion of its stock through 2013. JPMorgan looks very optimistic in its choosing to do so but this would amount to large earnings for the bank.

Regardless to the stress test some analysts feel its still too early for the Fed to allow the larger banks to take any actions in order to reduce capital. Anat Admati, a professor of finance and economics at Stanford University said, “it’s irresponsible and that depleting capital can expose the wider economy to risks because it leaves banks more exposed to shocks.”

The main question is if the latest stress test done by the Fed would do anything to improve the banking system.


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Photo by Karen Bleier/AFP/Getty Images

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