Wall Street’s Big Banks Passed The Fed’s Fire Drill

Wall Street’s Big Banks Passed The Fed’s Fire Drill
Daniel Johnston

8 months ago2 mins

Mentioned in story

What’s going on here?

Wall Street’s big banks aced the Federal Reserve’s stress tests.

What does this mean?

Ever since the 2008 Wall Street horror show, the Federal Reserve (the Fed) has subjected big banks to yearly tests, to see if they’re prepped for real-world problems. And this year’s paper was a real doozy. Banks had to prove that they could navigate a serious nightmare situation: unemployment rising to 10%, commercial real estate prices diving by 40%, house prices taking a 38% tumble, and short-term interest rates nearing zero. The results, believe it or not, were pretty promising: although that doomsday scenario would see the 23 biggest US banks lose a chunky $541 billion, they’d still have more than enough left over to survive the freefall.

Stress test

Why should I care?

The bigger picture: Rainy day funds.

Investors watch stress tests keenly: after all, they determine how much banks need to set aside as a cushion, meaning the rest could potentially be paid out to shareholders through buybacks or dividends. And this year, heavyweights like JPMorgan and Bank of America aced the tests – prompting a small investor celebration and a share price bump to boot. But there’s a twist: see, rumor has it that US regulators might soon raise the bar on reserve requirements. There is a silver lining, though: those new rules could extend to midsized banks too, the instigators of this year’s banking crisis, which could help steady the sector.

Regional bank stocks down

Zooming out: Get on your hiking boots.

For those praying that rate hikes are done and dusted, the recent meeting of the world’s central bank heavyweights may be a bit of a downer. See, the Fed, the Bank of England, and the European Central Bank have hinted that they’re not finished wrestling with inflation. And that means more rate hikes could be on the horizon, sticking around longer than folk expected too.

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