The Second Round Of Stress Tests By The Federal Reserve

The first phase of the Fed's stress test is "quantitative testing". Under the assumption of extreme circumstances, the level of capital ratio of banks should meet the relevant requirements.

The second stage stress test is a "qualitative test". This stage is more subjective, requiring banks to have a good link to identify risks and prepare risks.

Last week, the Federal Reserve released the first phase of the stress test in 2015.

The simulated scenario is that the price of housing has dropped by 25% and the stock market has fallen by nearly 60%.

The test is designed to ensure that large banks can suffer substantial losses in the market turmoil without receiving taxpayer assistance.

The 31 banks participating in the test passed the requirement that the level of capital ratio reached at least 5%.

This is the first time since the Federal Reserve began its testing in 2009, it has all exceeded the threshold of capital for the first time.

In the second phase of the Fed's stress test, the capital proposal of Deutsche Bank and the Bank of Spain, Santander and the US subsidiary failed to pass. The Federal Reserve believes that in the "qualitative assessment", the two banks are inadequate, including the ability to assess losses and identify risks.

In particular, the Federal Reserve says there are many major flaws in Deutsche Bank's capital plan.

The two banks must resubmit capital proposals and not pay dividends to their parent companies or shareholders over the previous year's dividend scale, that is, they can not issue additional dividends.

Last week, Wall Street news website reported that the two banks may not be able to pass.

The second phase is "qualitative assessment".

In addition to Deutsche Bank and Bank of Santander, Spain,

The capital proposal is only passed through conditionality.

Bank of America can increase dividend payments and share repurchases to investors, but the Fed asked the Bank of America to renew its proposal to solve some "weaknesses", such as Bank of America's ability to measure losses and revenues.

If the Fed thinks the revised bill proposed by the US bank will not meet the requirements, the Fed will restrict the issuance of US dollar capital.

In 2013, the capital proposals of JP Morgan and Goldman Sachs were also only "conditioned", which were passed after the two banks were re - submitting their capital proposals.

Goldman Sachs, J.P. Morgan and Morgan Stanley first submitted

The return plan did not meet the Fed's requirements, and in extreme cases, the capital level was too low.

The banks revised the shareholder return plan last week and passed this week.

According to the Wall Street journal, Morgan Stanley has reduced the size of dividends or share repurchases.

That is to say, these big banks barely passed the stress test, indicating that the Fed is very strict with bank regulation.

Citibank passed the stress test.

Previously, Citibank CEO Michael Corbat said that if Citigroup could not pass the stress test in third years in four years, he would choose to step down.

Last year, Citibank failed to pass the stress test. Since then, Corbat has invested a lot of time and effort to ensure Citigroup passed the stress test this year.

After the announcement of capital proposals by the Federal Reserve, several banks announced plans to return capital to investors.

Morgan Stanley plans to buy up to $3 billion 100 million, raising quarterly dividend to $0.15 per share.

The American Express plan will buy up to $6 billion 600 million, and will also raise quarterly dividend.

Goldman Sachs raised quarterly dividend to $0.65 per share.

Bank of America announced the expansion of share repurchase scale, but said it would not increase dividend distribution. It is the only six largest bank in the United States that does not increase dividend.

The picture below shows the trend of banking stocks in recent months.

After the second round of stress tests released by the Federal Reserve, Citigroup and Morgan Stanley share prices rose sharply and rose by more than 3%.