March comes in like a lion for the nation’s largest banks. Yesterday the Federal Reserve announced how “the big banks” fared on their annual stress tests (The Wall Street Journal’s Briefly blog offers what to know and what is relevant about the exams). The reports were positive: all 31 stressed banks “passed,” showing that they are stronger than they have been at any time since the tests began in 2009, the Fed reported.
It was a critical day in the eyes of those at Bank of America, Chase, Wells Fargo and others at the top. Thursday also served as a preview for their shareholders of what’s to come next Wednesday, when the Fed announces whether it has approved of each bank’s plans to return some of the reserved capital to shareholders, following the positive results.
Ultimately, the Fed’s annual stress tests of the largest 31 financial institutions is to ensure that the bank’s capital levels could withstand another financial collapse, should one occur. While federal regulators only require this small number of banks to be subject to these particular stress tests, as outlined in the Dodd-Frank Act following the economic crisis of 2008, stress testing is becoming a critical part of financial institutions’ risk management strategies, regardless of their asset sizes. Stress testing allow banks and credit unions to examine the portfolio, concentrations and specific borrower relationships to identify risk and make more informed capital planning and lending strategy decisions based on their individual results. Most importantly, each bank or credit union not under the Dodd-Frank criteria can use a variety of stress testing methods that best fit their needs and profile.