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US Banks’ Stress Tests May Offer Some Comfort

US Banks’ Stress Tests May Offer Some ComfortUS Banks’ Stress Tests May Offer Some Comfort

The stress tests created for banks by US regulators after the 2008 financial crisis may prove their worth this week, providing a timely message on banks' hardiness in the midst of turbulence over last week's vote by Britain to leave the European Union.

The Federal Reserve will release the second set of results from stress tests it has conducted annually on large banks since 2009 on Wednesday. The tests look at how strong banks would be in the event of an unforeseen crisis, with economies in freefall, stock markets dropping precipitously and market counterparties at risk of failure, Reuters reported.

And while the stresses that the Fed is testing for in this case are imagined, analysts say the results should be reassuring to investors worried about banks' exposure to Brexit, an outcome that took the world and markets by surprise.

"This is a real-world test that can help demonstrate the greater resiliency of banks' balance sheets and the benefits of de-risking that, while having hurt revenue this decade, should help incrementally in times such as this and show the relative strength of US banks," said Credit Lyonnais Securities Asia bank analyst Mike Mayo.

Investors may take some comfort in the fact that the Fed's stress test scenarios are much tougher than anything the banks have so far faced as a result of Brexit.

Mayo said the stress test should show that US banks will be able to keep dividends stable and even increase dividends while dealing with the fallout of the UK referendum.

This year's results are coming at a time when the presumptive Republican presidential nominee, Donald Trump, and some lawmakers, are angling to dismantle the financial reform regulation that formalized stress tests and other rules to make the system safer.

As a result of those Dodd-Frank reforms, US banks are arguably better suited to handle market shocks like those caused by the surprise Brexit vote.

The banks have begun putting some plans into place to prepare for the UK leaving the EU, but making moves too soon could be a costly mistake.

 

Financialtribune.com