Warren Buffett will make a couple of billion stress tests on US banks

The US Federal Reserve announced the results of its latest banking stress tests late last week, and most US banks passed with flying colours.

The stress tests were introduced after the 2008 global financial crisis in order to ensure US banks were protected in the event of another liquidity squeeze.

A pass-mark on the stress tests effectively gives banks the all-clear to ramp up dividend payments and share buybacks.

And that's good news for billionaire Warren Buffett's Berkshire Hathaway, which holds large positions in a number of the biggest US banks.

One of the standout performers from the stress tests was Wells Fargo, in which Berkshire has a 9.9% stake.
According to the Financial Times, Wells Fargo's robust capital position means Buffett can now expect an additional $800 million in dividend payments over the coming year.

Berkshire also owns a sizeable chunk of Bank of America, after a clever investment structure which allowed it to buy 700 million shares in BoA last year at a discount to market value.

The US Fed took a slightly more relaxed approach in the latest round of stress tests, following years of negotiations with Wall Street which viewed the tests as overly cumbersome.

For example, investment banks Goldman Sachs and Morgan Stanley both came up short on certain measures of this year's tests, due to changes in past tax obligations stemming from the US tax-cut legislation in December.

However, in this case the Fed viewed the changes to tax laws as a once-off and it was therefore unnecessary to fail the two banks. Other companies still struggled, including Deutsche Bank which failed outright.

The Fed has historically carried out its stress tests on a simple pass/fail basis. It implements the tests by reviewing banks' balance sheets to see if key metrics would hold up in various hypothetical worst-case scenarios.

Source: BI

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