U.S regulators will declare the result of a stress test for six large banks on March 7th. The test will measure the potential of big banks to survive a financial shock. U.S. regulators will release the results of the capital plan evaluation of the largest banks this week, according to Federal Reserve.
The six large banks undergoing this test are; Bank of America Corp (NYSE:BAC), Citigroup Inc. (NYSE:C), Goldman Sachs Group, Inc. (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS) and Wells Fargo & Company (NYSE:WFC), these banks will get their portfolio tested to establish their capacity to overcome any severe financial downturn.
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The banks have to go through this stress test, according to the 2010 Dodd-Frank financial oversight law, to prove that they have enough capital cushions. Banks maintaining more than $50 billion in assets were mandated to go through this test. The hypothetical conditions, which were used, were the toughest one. The conditions were U.S. unemployment rate will increase up to around 12 percent, Europe and Japan would go through the recession, and China will face sharp decline in its economic activity. The assumptions in this test are that there would be no changes in the dividend payment and no common stock repurchase will take place in order to make the comparison easy.
This test was initiated by the U.S. central bank in 2009 in order to regain confidence in the financial system after the U.S. witnessed the downfall of massive Bear Stearns Cos and Lehman Brothers Holdings Inc. (PINK:LEHMQ) in the Great Depression. Regulators in U.S. felt the need to perform this test with a capital-planning necessity to enhance Board’s management of risk, dividend and stock buyback decision
The economic conditions were released by the Central Bank in November 2012. These extreme scenario will be used to test the banks. After releasing the scenario in November last year, the Federal Reserve made it clear that these scenarios were not forecasts and were formulated to test the banks resilience and their capacity to meet the credit requirements of household and business.
“Supervisory stress test results will include data such as capital ratios, revenue, and loss estimates under a severely adverse scenario,” the Fed said in a release in Washington. The parameters will include “a severely adverse scenario provided by the Federal Reserve, and reflect the capital actions the companies plan to undertake.”
Big banks holding companies will also go through an assessment of their individual capital to ensure they are strong enough to bear a financial shock. This result will be released on March 14 as per Federal Reserve.