A fitness report to be released by the Federal Reserve this week is expected to give most banks a good bill of health. The positive results expected from this round of stress tests, conducted by the Fed to check how the 19 largest banks in the country would withstand a severe economic meltdown, would be another sign of recovery for the economy. The first round of stress tests, held in 2009, found the banks’ balance sheets to have come up short by billions of dollars, according to The New York Times.
Don’t Miss: WTO Rules Boeing Received Illegal Subsidies.
The latest tests assumed a scenario where stocks fell 50 percent, the national unemployment rate rose as high as 13 percent, the gross domestic product dropped 8 percent, and housing prices fell considerably. The tests also took into account the possibility of the European markets being hit. According to the NYT report, banks had to show that their Tier 1 capital ratio would be at 5 percent or better in such an economic situation in order to pass the tests.
Banks that fail to pass the tests will be asked to raise billions in new capital, while those passing would be allowed to buy back stocks and raise dividends.
“The industry is on much firmer ground than it was three years ago,” Jason Goldberg, an analyst for Barclays, told NYT. “This will show how much progress the banks have made in cleaning up their balance sheets.”
The tests have been conducted on 19 of the country’s largest banks, including JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC) and Citigroup (NYSE:C). Reuters reported hat analysts were pegging Citigroup, one of the worst hit during the financial crisis, to be the big winner. JPMorgan Chase, Wells Fargo (NYSE:WFC) and PNC Financial Services (NYSE:PNC) are also expected to perform well, while Bank of America might struggle.
In another difference from earlier stress test — the second round was conducted in March last year — this time the results will be made public by the Fed. Earlier, banks had the option of announcing their own results and explaining the measures they were going to take.
Read more insightful stories at Wall St. Cheat Sheet:
To contact the reporter on this story: Aabha Rathee at email@example.com
To contact the editor responsible for this story: Damien Hoffman at firstname.lastname@example.org