After all banks passed The Fed's quantitative "Adverse scenario" stress test last week, investors waited anxiously to see just how much the big banks would be allowed to buyback and dividend to shareholders.
Bank stocks have outperformed the market since the stress test results were released.
Overall, analysts are expecting big banks to slow payout growth after surging for two years. The 12 U.S. lenders tested are expected to boost payouts by $5 billion, compared to more than $30 billion each of the past two years.
As Bloomberg notes, Deutsche Bank is atop the list of banks to watch today. The German lender's U.S. unit is expected to fail for a fourth time, which will be another blow to investor confidence as the bank struggles with restructuring and profitability. Last year, the Fed put Deutsche Bank's U.S. arm on a list of troubled lenders because of internal oversight deficiencies.
But, surprisingly, Deustche Bank was approved (after failing the last four times and the stock crashing to all-time lows during that time) along with the other 17 big banks (only Credit Suisse got a conditional approval).
The nation's largest banks have strong capital levels and virtually all are now meeting supervisory expectations for capital planning, the Federal Reserve Board on Thursday announced following its annual examination. As a result, the Board is not objecting to the capital plans of all 18 firms but is requiring one firm to address limited weaknesses identified from the test.
The Comprehensive Capital Analysis and Review, or CCAR, evaluated the capital planning processes and capital adequacy of 18 of the largest banking firms, including the firms' planned capital actions, such as dividend payments and share buybacks. Strong capital levels act as a cushion to absorb losses and help ensure that banking organizations have the ability to lend to households and businesses even in times of stress.
"The stress tests have confirmed that the largest banks are both well capitalized and place a high priority on strong capital planning practices," said Vice Chair for Supervision Randal K. Quarles. "The results show that these firms and our financial system are resilient in normal times and under stress."
The Board considers both quantitative and qualitative factors when evaluating a bank's capital plan. Quantitative factors include a bank's projected capital ratio under a hypothetical severe recession. Qualitative factors include the firm's capital planning process, including its risk management, internal controls, and governance practices.
The Board can object to the capital plans of all banks in CCAR each year on quantitative grounds, and firms that have been in CCAR for less than four years are also subject to an objection on qualitative grounds. If the Board objects to a firm's capital plan, the bank cannot make any capital action unless authorized by the Board.
The Board did not object to the capital plan from the U.S. holding company of Credit Suisse, but is requiring the firm to address certain limited weaknesses in its capital planning processes. The Federal Reserve did not object to the capital plans of the remaining 17 firms.
On balance, virtually all firms are now meeting the Federal Reserve's capital planning expectations, which is an improvement from last year's assessment. The firms in the test have significantly increased their capital since the first round of stress tests in 2009. In particular, the largest and most complex banks have more than doubled their common equity capital from around $300 billion to roughly $800 billion during that time.
Finally, we note that former FDIC chief Sheila Bair (who ran that agency during the financial crisis) was interviewed by Bloomberg TV this morning, and reminded investors that banks are stronger than they were back then, but still not “strong enough.” She said the stress tests won’t accurately capture how the banks will do in an actual downturn. “You need more robust loss assumptions.”