On Monday, several of the largest U.S. banks released their mid-year stress test results required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, which reflects stability in the banking system to a great extent. More importantly, this reaffirms the ability of U.S. banking giants to survive another economic meltdown.
Notably, the mid-year stress test is different from the annual Comprehensive Capital Analysis and Review (CCAR) process, conducted by the Federal Reserve. This mid-cycle stress test was performed under a hypothetical severely adverse economic scenario assumed by the individual banks.
Wells Fargo & Company (WFC), JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC), Citigroup Inc. (C) and The Goldman Sachs Group, Inc. (GS) were among the big banks that released their results reflecting that minimum capital levels would remain well above regulatory requirements during the nine-month horizon (from second quarter 2013 through second quarter 2015) of high unemployment, declining home prices and stock-market tumult.
Banks with huge consumer and commercial-lending businesses were also required to estimate their loan losses that would be at a lower level during the hypothetical slump. Notably, 18 bank holding companies that submitted their capital plan to the Fed in Jan 2013 under the CCAR process are required to publicly unveil a summary of the results of the company-run stress tests between Sep 15 and Sep 30 conducted under the strictly adverse scenario.
Though results of the individual banks reflected resilience, it is difficult to compare the results as each bank has its own economic assumption under the mid-year Dodd-Frank stress tests.
U.S. banks are showing signs of strength despite being compelled to meet strict regulatory standards. Though it is too early to be confident of the sector’s growth prospects, the progress seen in the first half of 2013 indicates a brighter future for those less dependent on risky activities and resorting to other profit-making ways.
Improved economic data such as higher consumer spending and GDP, improving housing market and declining unemployment rate raise optimism. However, still the current low-rate environment is the headwind going forward.
However, it is impressive to see that U.S. banks are taking legal and regulatory pressure in their stride, indicating their ability to encounter impending challenges. However, with the economy still in disarray, we do not envision the sector returning to its pre-recession peak anytime soon.
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