US banks prepare for tough stress tests from Fed

The biggest US banks are braced for a tougher round of stress tests from the Federal Reserve, which could crimp their plans for higher dividends and share buybacks.

The two-part exam, which became an annual event in 2011, is designed to assess whether banks have enough loss-absorbing capital to keep trading through a shock to the system similar to the collapse of investment bank Lehman Brothers in 2008.

The framework for the test was toughened up last month, with the Fed assuming bigger falls in unemployment, a deeper trough in Europe and negative short-term interest rates in the nine-quarter planning horizon. The chief US bank regulator then said last week it would look more critically at operational risks, assuming bigger hits from events such as class- action lawsuits, a rogue trader or a major cyber security breach.

As a result, banks are likely to be wary when asking the Fed for permission to return capital through dividends and buybacks, said analysts. The “more challenging” test means “capital requirements will continue to drift higher for the banking system,” an analyst at Goldman Sachs said. – (Copyright The Financial Times Limited 2016)