By Pete Schroeder
WASHINGTON, June 24 (Reuters) – Financial markets will gain a fresh glimpse into the overall health of the largest U.S. banks on Wednesday when the Federal Reserve releases the results of its latest stress test.
The results will reflect the health of 32 banks, including JPMorgan and Bank of America, but will likely be less dramatic than in prior years. The Fed said in February it would not use this year’s results to update each firm’s stress capital buffer, an added layer of capital large firms must hold that fluctuates based on how well they perform on the test.
With those buffers now holding steady, firms already have the information they need to make capital plans, including any potential stock buybacks or dividend changes. Raymond James analysts said in a note ahead of the results that they expect most banks to announce moderate dividend and stock buyback plans following the tests, noting that bank executives may opt for a more cautious approach given broader uncertainties.
“Despite the accommodative regulatory backdrop, we believe some management teams could be somewhat conservative given the aforementioned geopolitical/macro uncertainty and inflationary pressures,” they wrote.
Rather, analysts say banks will likely wait to adjust plans until regulators have finished implementing several new capital rules favored by the industry, most notably the Basel proposal on risk-based capital under consideration.
Those changes could unlock billions of dollars in additional capital for banks to return to investors or deploy within their business.
“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,” wrote KBW analysts in a note previewing the stress tests.
The central bank is reworking its stress testing process in response to years of criticism from the banking industry that the exams are opaque and subjective. Given that the central bank is still soliciting feedback on its plans to make the test more transparent, Fed officials opted to keep capital levels steady based on last year’s exam.
A Fed spokesperson declined to comment ahead of the afternoon’s results, which will be made public at 4 p.m. ET (2000 GMT).
(Reporting by Pete SchroederEditing by Rod Nickel)