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“On June 25, the Federal Reserve will announce the results of the annual stress test and comprehensive capital analysis and review (CCAR). As always the feedback will be closely watched by market participants.
This year, 34 financial services firms with over $100 billion each in assets will be evaluated.
The firms have been required to submit their own capital plans and stress testing by April 6. As part of the Fed stress tests, the firms will be evaluated under two scenarios – baseline and severely adverse. New this year, will be the incorporation of FASB’s CECL accounting standard for credit losses. Additionally, the Board will establish a stress capital buffer (SCB) for each company based on projected starting and minimum projected common equity tier 1 capital under the severely stressed scenario plus four quarters of planned common stock dividends as a ratio of risk-weighted assets. This element replaces the previous “pass/fail” designation.
The results will provide the framework for shareholder capital returns over the next four quarters. This year, it is unlikely that the firm’s will announce immediate buybacks since most firms have already suspended them due to impacts from Covid-19 until potentially 2021. So the focus will mainly be on change in dividends. American Express should be one firm to raise given its strong capital position. Wells Fargo which has a high payout ratio currently and may decide to reduce its dividend.
Although the nation’s financial services companies face challenges associated with the dynamic economic conditions from the pandemic, they still remain well positioned to continue their important roles in financial markets and personal savings and loans. Since the financial crisis, the system has worked well to increase capital at these institutions and reduce riskier operations.”
