Wall Street banks score good grades on stress test

Yellen: Looking at changes to bank stress tests
Yellen: Looking at changes to bank stress tests

Wall Street banks have enough cash on hand to keep the Fed happy — this year, at least.

The 33 banks met or exceeded regulators' required capital cushions they would need to offset losses, according to the Federal Reserve, which on Thursday released the first portion of its annual stress test results.

Banks had to project greater losses this time around, including $113 billion in trading losses for the eight biggest firms.

The tests require banks to calculate how their holdings would fare in the event of various scenarios, including rising unemployment and a "severe global recession." They're required to apply those events to their holdings, testing whether their balance sheets would stand up to another economic crisis. The Federal Reserve began administering the tests in the wake of the global financial crisis, which began to gain momentum in 2007, and part of its plans include tweaking tests annually to ensure that individual Wall Street firms can weather deteriorating credit scenarios and market turbulence.

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Still, the banks' stress test headaches may be back with a vengeance next year. Some Federal Reserve governors reportedly said they expect to raise capital requirements, which would add to the burden those financial institutions face as they prepare responses to the annual regulatory exams.

"The changes we make in each year's stress scenarios allow supervisors, investors and the public to assess the resiliency of the banking firms in different adverse economic circumstances," Governor Daniel Tarullo said in a statement. "This feature is key to a sound stress testing regime, since the nature of possible future stress episodes is inherently uncertain."

Brexit bank impact
Brexit bank impact

Banks may be sweating next year's stress tests, in which they could be pushed to further broaden capital cushions by regulators, but the immediate hurdle for Wall Street firms and international banks will come next week, when the Federal Reserve announces which institutions passed or failed the qualitative part of their exams. Bank officials have previously complained that the qualitative portion tends to be subjective, meaning that regulators' rejection of a bank's capital planning or stress testing preparedness could come on grounds the company feels are arbitrary.

Not that it lessens the blow to banks, if they fail. Missing the mark on stress tests may mean that a bank would have to put off things like dividends and buybacks until regulators are satisfied with their strategy.

"If you get dinged on the qualitative [test], there's nothing you can do," said Ernie Patrikis, a partner at law firm White & Case. "The shareholders will not be happy."