KBW: Dodd-Frank Stress Tests Leave Cards Winded

We all like to think that our mobile payments solutions of choice—be they actual cards or just connected to a card—are stable and will always be around and ready when we need them. Keefe, Bruyette & Woods (KBW) recently dropped word our way about the results of the annual Dodd-Frank Act stress tests (DFAST) scenarios, and while the word was good, it wasn’t good by much.

The good news is that every company KBW covered passed its DFAST ordeal. That alone says that things are stable and holding. However, KBW also pointed out that credit card companies saw “…lower minimum stressed capital ratios…” this year as compared to last. The problem was actually a couple points of a recovering economy; the recent tax reform and high payouts stemming from good growth meant lower starting points in available capital.

KBW also notes that there’s a certain amount of subjectivity in DFAST results—several factors go into determining DFAST rankings, some more useful than others—so some further testing will likely tell better results. For right now, however, things are reasonably good, though perhaps not as good as anyone would like to see.

In fact, KBW noted that outcomes were so well, that four groups in particular its study targeted—American Express, Capital One, Discovery and Ally—would all engage in a certain amount of stock buyback in the near future. Moreover, all but one would maintain its quarterly dividend at current levels. The one outlier, Ally, was expected to increase its dividend.

So basically, the news is reasonably good, but only just, and that in and of itself is a type of bad news. It’s basically like saying your tires have almost no tread left; there’s tread on the tires, they’ll get you where you’re planning to go today, but if you don’t make one of those places the tire store, and fairly soon, you’re cruising for a blowout.

While things are reasonably good right now, now’s the time for banks to make hay while the sun shines and move to improve those margins that are only good enough today. Improvements in stress testing figures help ensure that when actual stress happens—you know there will be another recession eventually—the organization is better-placed to fend it off, and thus keep our mobile payments systems secure.