Financial markets are set to receive a fresh look at the condition of the country’s biggest banks on Wednesday, when the Federal Reserve is scheduled to release the outcomes of its most recent stress test evaluations.
The findings cover 32 banking institutions, among them JPMorgan and Bank of America. However, the results are expected to carry less weight than in past years. Back in February, the Fed announced it would not use this year’s test outcomes to adjust each bank’s so-called stress capital buffer — an extra layer of financial reserves that large institutions are required to hold, which can shift depending on their test performance.
Because those capital buffers are remaining unchanged for now, banks already have enough information to move forward with financial planning, including decisions about stock buybacks or dividend adjustments. Analysts at Raymond James said in a pre-release note that most banks will likely announce modest plans on both fronts, adding that bank leadership may lean toward caution given the current economic climate.
“Despite the accommodative regulatory backdrop, we believe some management teams could be somewhat conservative given the aforementioned geopolitical/macro uncertainty and inflationary pressures,” the analysts wrote.
Industry watchers say banks are more likely to hold off on bigger capital decisions until regulators finish rolling out several new capital rules that the banking sector has been pushing for — most notably a proposal tied to risk-based capital requirements known as the Basel proposal.
If those rule changes go through, they could free up billions of dollars that banks could either return to shareholders or reinvest in their own operations.
“The industry is in good shape with capital, as all the names have excess capital relative to the implied pro forma target capital ratios and requirements as the industry continues to be in a position to take advantage of de-regulatory momentum,” analysts at KBW wrote in a note previewing the tests.
The Federal Reserve has been working to overhaul the stress testing process after sustained criticism from the banking industry that the exams lack transparency and rely too heavily on subjective judgment. Since the Fed is still gathering public input on how to make the tests more open, officials chose to keep capital requirements at the same levels established by last year’s exam.
A spokesperson for the Fed declined to offer any comment ahead of the results, which were scheduled to be released to the public at 4 p.m. ET.
