What's going on?
The US Federal Reserve (a.k.a. “the Fed”) conducted its annual “stress test” of major banks on Thursday. And… everyone passed! Bar one.
What does this mean?
The Fed – along with its European counterpart, the ECB – regularly tests major banks’ abilities to withstand tough times via stress tests. Essentially, they check whether banks have enough cash in the vault to survive a major economic downturn. These tests have become much more common since the global financial crisis, as regulators try to avoid a repeat of the disaster. With some investors spying a recession in as little as 18 months, passing this test may be more important than ever.
Deutsche Bank’s US unit failed the test – piling onto its recent woes. All other banks passed.
Why should I care?
The bigger picture: A cash bonanza for shareholders.
Banks are planning to pay out as much as a combined $200 billion to shareholders over the next year. The biggest four banks alone are set to fork out roughly half of that – a whopping 50% more than after last year’s test. As banks have to disclose their planned payouts in stress tests, this bonanza has effectively been signed off by the US government. In addition to dividends, companies are likely to also return money through share buybacks – which have already hit record levels this year.
For markets: Banks get a clean bill of health, except for one.
Deutsche Bank has failed a test before. This time, the Fed wasn’t happy with its plans to move money out of the US to its German mothership – although it’s considering whether it wants to have any involvement in the US market at all. Investors were focused on Goldman Sachs and Morgan Stanley, which both barely passed last week’s initial test – and only passed this time on condition that they don’t increase their payouts to stockholders beyond last year’s levels – likely contributing to both of their stocks falling over the last week. On Wednesday, a major index showed thirteen straight days of decline for US banks’ stocks, the longest losing streak on record.