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- The financial crisis is over – US banks have passed FED’s stress test
The financial crisis is over - US banks have passed FED's stress test
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Loading...America’s 34 biggest banks have passed the Federal Reserve's stress test, giving them the green light to pay out dividends and buy back stock. It’s a sign that regulators have finally closed the book on the 2008 financial crisis, a time when banks starved for capital were forced to do the opposite.
“With all of the banks passing the stress tests, with many giving back 100% of earnings in capital returns, this is a clear, demonstrative stand that the banks are back to full health,” RBC’s Gerard Cassidy told Yahoo Finance.
The news comes during a week when central bankers around the world have signaled their desires to tighten monetary policy. Comments from European Central Bank (ECB) President Mario Draghi Tuesday suggested the level of stimulus will be adjusted as the economy improves. Bank of England Governor Mark Carney said that the time is nearing for an interest rate increase. Even Canada’s Stephen Poloz reiterated he is considering a rate hike.
During the latest Fed meeting on June 12, Fed Chair Janet Yellen emphasized the need for policy normalization, including continued rate hikes despite weak inflation data. Importantly, the Fed unveiled its plan to reduce its balance sheet, which became bloated during the crisis as it bought up bonds in its effort to keep the bond markets liquid and interest rates low.
But her most optimistic remarks came during a talk in London on Tuesday.
“Will I say there will never, ever be another financial crisis? You know, probably that would be going too far. But I do think we’re much safer and I hope that it will not [happen] in our lifetimes and I don’t believe it will,” Yellen said.
Specifically, banks’ average payout—the amount banks will distribute to shareholders via dividends and buybacks—is expected to reach close to 100% of their earnings over the next year versus 83% last year, according to Cassidy.
JPMorgan Chase (JPM), Bank of America (BAC), Morgan Stanley (MS) and Wells Fargo (WFC) were among the banks that immediately announced dividend raises and share buyback plans.
These positive stress tests, along with an improving economy and the prospect of rising interest rates, have fueled financial sector stocks higher, which is important for the overall economy, Cassidy said.
The Financials SPDR ETF (XLF) is up 35% in the past year, double the performance of the S&P for the same period.
Source: Bloomberg Pro Terminal
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