Here, DealBook takes a closer look at how the tests played out.
Who were the clear winners?The Public. The ultimate reason the Fed is testing the banks is to make sure they can keep lending through a financial crisis and not require bailouts. The stress tests have not always existed. They were introduced after the financial crisis of 2008, and most experts agree that they’ve made the big banks safer. The most common way of measuring a bank’s strength is to look at its capital levels. As the Fed noted on Thursday, the 35 banks in the stress test had more than $1.2 trillion of capital at the end of 2017, an increase of approximately $800 billion since 2009.
A caveat, though: The tests may get tweaked in the future in ways that make them easier for the big banks. In proposed changes to the stress tests and capital requirements, the Fed has suggested removing a measure of capital, known as the supplementary leverage ratio, that some banks find hard to meet. “This will make the stress tests less stressful,” said Gregg Gelzinis, of the left-leaning Center for American Progress.
Wells Fargo is a surprising winner. The bank has been embroiled in several scandals that harmed customers. That did not appear to hold it back in the stress tests. Nor did the stringent regulatory action the Fed imposed on the bank earlier this year, which included a cap on its growth. Wells Fargo, having passed the stress tests, on Thursday announced that the Fed had signed off its plan to initiate roughly $33 billion in stock buybacks and dividends, more than double the amount approved after last year’s test. That payout would be 40 percent more than earnings analysts expect Wells Fargo to make in the second half of this year and the first half of next, which is the period covered by the banks’ capital plans. One possible reason Wells Fargo can distribute so much capital is that it needs less to finance new loans since the Fed restrained its growth. The big payouts make the balance sheet cap imposed by the Fed less painful for the bank’s shareholders.
How bad was it for Morgan Stanley and Goldman Sachs?The limit on pay outs carries a stigma, but it could have been worse. Morgan Stanley’s planned $6.8 billion distribution to shareholders after this year’s stress test is close to what it planned after last year’s. Goldman’s planned payout for this year, $6.3 billion, is lower than last year’s request of around $9.9 billion. But it’s important to note that Goldman has only paid out roughly $5.7 billion of last year’s sum.
One reason the Fed did not object to the two firms’ capital plans is that, although their payouts would have taken their capital below minimum requirements in the stress tests, there were mitigating circumstances. The two banks’ results were negatively affected by the recent tax bill enacted by Congress. Adapting to the new law, which meant doing things like repatriating money from abroad, caused losses at Morgan Stanley and Goldman Sachs that depleted their capital going into the stress tests. Because of the one-time nature of the losses, and the fact that the tax cuts will bolster earnings over time, the Fed did not object to the two banks’ plans.
