WASHINGTON (Reuters) – U.S. financial regulators, banks and their investors will get their first glimpse into the health of the nation’s banking system as it confronts soaring corporate and consumer defaults in the economic crisis sparked by the novel coronavirus.
FILE PHOTO: FILE PHOTO: A man wears a protective mask as he walks past the New York Stock Exchange on the corner of Wall and Broad streets during the coronavirus outbreak in New York City, New York, U.S., March 13, 2020./File Photo
And no-one, including the U.S. Federal Reserve which sets the annual bank “stress test” exams, has a clue what to expect.
“That is the $100,000 question. Actually, it’s much bigger than that and I am sure the Fed is working hard to get it right. We’re curious, and we don’t have clarity,” said Kevin Fromer, CEO of the Financial Services Forum, which represents the biggest banks in the U.S.
That could mean banks may be on the hook for billions more in capital than they had anticipated, which could ultimately force them to slash dividends, slim down their balance sheets or reduce lending.
Since the 2009 financial crisis, the Fed has tested annually a snapshot of big bank balance sheets against an extreme hypothetical economic shock. The results ultimately dictate how much capital banks can dish out to shareholders.
This year, however, the real life economic blow dealt by the pandemic has by several measures exceeded the doomsday scenario the Fed unveiled in February, leading some banks to grumble it may as well scrap the tests this year.
Instead, the Fed told banks after they had handed in their exam papers in April that it was adding an extra test to reflect the rapid deterioration of economic conditions in recent months.
That eleventh-hour change combined with other tweaks the Fed passed last year has thrown the stress test playbook out the window.
“Unnecessarily increasing bank capital could serve to limit bank balance sheets at exactly the wrong time, likely chilling economic recovery,” the Securities Industry and Financial Markets Association wrote in a note on Friday in which it urged the Fed to stick to its original plan.
While the banking sector has so far proved resilient, some Fed officials worry it will come under greater stress as mass unemployment leads to more corporate and consumer debt defaults, according to minutes from the Fed’s April meeting.
The country’s largest four lenders – JPMorgan Chase & Co (JPM.N), Wells Fargo & Co (WFC.N), Bank of America Corp (BAC.N), and Citigroup Inc (C.N) – combined put aside $20 billion to cover expected loan losses in the first quarter alone. Those lenders, alongside Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), are among the 34 banks to best tested this year.
Banks say they are in the dark about the potential outcome because the Fed hasn’t provided any details on how the extra analysis will work or which factors it plans to probe.
Some analysts expect the…
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