Adam Fagen Bank of America bunting

Bank Stress Test’s Second Part Proves a Narrower Win

March 14, 2024         By: Steven Anderson

Last week we talked about a stress test designed to get a handle on the status of banking in the United States, and though that round of testing turned out to be a quite positive one, it wasn’t the only round the banks would have to endure. Indeed, we noted a second round to come, and the results of that second round appear to have hit.

The news is actually better than some may have expected, but not necessarily by much.

The reports suggest that five out of the six largest banks in the United States raised dividend payments following the successful clearing of testing.

The only bank that didn’t win an unqualified approval in the testing was Bank of America, according to reports, who was subject to what the Federal Reserve called “certain weaknesses” in its capacity to measure both losses and revenue alike.

Interestingly, Bank of America didn’t fare so well in the last round of testing, either, as the company found itself on the Fed’s danger list in the “Tier-1 leverage ratio” studies, though it did stay above several firms in the “total risk-based capital ratio” testing segment.

Citigroup, in response to the testing, raised its dividend for the first time since 2008, according to reports, a very good sign for a bank that’s been having some clear difficulties since the 2008 financial crisis.

That’s a bit of a surprise given how Citigroup fared in the first round, showing up in danger listings for both Tier-1 and total capital ratio testing.

Indeed, Goldman Sachs and Morgan Stanley likewise appeared on both the Tier-1 and total capital ratio danger lists, yet both reportedly had plans to stage new dividend releases and stock buybacks. These plans, however, are revised plans, so some caution might well have won the day for these firms.

Still, it’s a fairly good field overall; we knew going in that this round of tests would be much, much harder than the previous round, and for so many to have made it through in one piece—or even in most of one piece as the lower-performers did—is a welcome sign.

Indeed, the banking system as we know it may well be poised for a better future, and given how much we depend on the banking system in this country, that’s good news.

So at the end of the day, the prevailing attitude here might be best summed up as “cautious optimism.” There’s a lot going on in the field, and changes could strike at any time, but most of the banks appear healthy and most importantly, prepared.