Bank Stress Test Relief

All major U.S. banks passed the Federal Reserve's latest stress test

All 34 banks passed the Federal Reserve’s latest stress test, suggesting they have enough capital to continue lending to households and businesses during a severe recession

The tests indicated banks could withstand 10% unemployment and a 55% drop in stocks. Even if these conditions occurred, the 34 banks could still have, on average, a capital ratio of 9.7%, well above the 4.5% required by law. The capital ratios are a measure of the cushion of capital a bank holds against unexpected losses. 

After passing the test, banks will be set to return tens of billions of dollars to investors in the form of dividends and stock buybacks. They may announce those plans as soon as Monday.

According to Barclays analysts, JPMorgan is set to lead the way, with $19 billion in combined dividends and buybacks. Bank of America and Wells Fargo could follow, both with about $15 billion in buybacks and dividends. In all, U.S. banking giants are expected to return $80 billion to shareholders this year by some estimates.

The KBW Bank Index is down over 25% so far this year.

"Banks are well capitalized, which is a comforting data point given the last major recession in 2008-09, and many, notably JPMorgan Chase, are bolstering their reserves as they prepare for a recession. Normally rising rates would be the wind in banks's sales, but the threat of a deep downturn may be to blame for investors' muted reaction to bank stocks," said Caleb Silver, Editor-in-Chief of Investopedia.

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