For Immediate Release
Chicago, IL - November 28, 2011 - Zacks.com announces the list
of stocks featured in the Analyst Blog. Every day the Zacks Equity
Research analysts discuss the latest news and events impacting
stocks and the financial markets. Stocks recently featured in the
blog include
Citigroup Inc.
(
C
),
Bank of America Corp.
(
BAC
),
JPMorgan Chase & Co.
(
JPM
),
Goldman Sachs
(
GS
) and
Wells Fargo & Company
(
WFC
).
Get the most recent insight from Zacks Equity Research with the
free Profit from the Pros newsletter:
http://at.zacks.com/?id=5513
Here are highlights from Friday's Analyst Blog:
Will Stress Test Protect Our Money?
It's time again for America's biggest banks to flex their
financial muscles. Yet another round of stress tests await these
banks that need to prove their financial prowess, should another
recession befall. Among the targeted banks, six that are
susceptible to the European crisis will have to go through even
tougher tests this time. But the question is, will this really help
us with respect to financial flexibility and protection?
Before finding the possible answers to this question, let's have
quick look on the Federal Reserve's stress-test initiatives.
Starting with the latest step, earlier this week, the Federal
Reserve ordered the top 31 U.S. banks, with assets of $50 billion
or more, to participate in stress tests. These banks will have to
submit their plans to the Fed by January 9.
This will mark the fourth round of bank stress tests since 2009.
The prior tests were conducted in early 2011, late 2010 and in
2009. Earlier, the periodic stress tests were applicable to the 19
big banks regulated by the Federal Reserve. But more 12 banks with
at least $50 billion in assets will now run for the first time.
The Requirements
The banks need to file their capital plans to the Fed by January
9 to undergo the new tests. They will have to adhere to the
requirement even if they don't plan to increase dividend
payments.
The banks that intend to boost dividends will also have to prove
their capability to comply with the upcoming tougher Basel III
banking regulations. Those that fail the tests may not be allowed
to distribute dividends. However, the banks will get an impetus to
take initiatives for raising new capital to meet the Fed
requirements. Results will be published in March.
The Aim?
The selected banks would need to demonstrate that they have
adequate capital to address potential losses over the next two
years under several stressful scenarios.
The environment of the last two rounds of stress tests and the
upcoming one are dissimilar to the Fed's first round. The first
round, conducted when the country was teetering under tremendous
recessionary pressure, was aimed at estimating how much the banks
would lose if the economic downturn turned out to be deeper than
expected. Since then, the test rounds are more like precautionary
measures amid economic recovery.
How Much Tougher This Time?
The biggest U.S. banks, including
Citigroup Inc.
(
C
),
Bank of America Corp.
(
BAC
),
JPMorgan Chase & Co.
(
JPM
),
Goldman Sachs
(
GS
) and
Wells Fargo & Company
(
WFC
) - will have an even higher stumbling block to clear as they have
significant exposure to the stressed European countries - Greece,
Ireland, Italy, Portugal, and Spain - known as the GIIPS.
These banks would have to go through a hypothetical market shock
to prove their ability to endure domestic as well as global
recession. The hypothetical stress scenario would assume an
increase in unemployment to above 13% in early 2013, a
decrease in U.S. GDP by as much as 8% plus a significant slowdown
in U.S. and global economic activities.
Also, these banks have to prove their ability to keep their core
Tier I common equity above 5% even under imaginary stress.
The Story Behind
Though capital strength verification is definitely a necessary
step in the midst of economic recovery, this decision was not taken
solely by the Federal Reserve. When the recession broke out, the
Fed had barred all banks from increasing dividends.
Following sharp cuts in dividends due to increased government
intervention, banks had been pressuring regulators for months to
let them restore their dividends after they repaid the bailout
money. The primary intention of the banks was to attract new
investors by enhancing dividend payments. Since 2010, the Fed has
been keeping this demand, but only for those banks that pass its
stress tests.
Stress Tests: Boon or Bane?
The economic benefits of the stress tests are indisputable. It
goes without saying, that these would keep the banks on their toes.
Banking biggies would perform under pressure and try to build their
weak capital levels, which threaten the economy. The whole drill
could ultimately translate into less involvement of taxpayers'
money for bailing out troubled financial institutions.
But the most dependable banking names in terms of dividend
payment will have to face tougher tests ahead. Naturally, their
chances of passing the tests and gaining eligibility to enhance
shareholder value are rather dim.
In fact, the challenge is not just contained to the big banks.
The story is much the same for the other financial institutions
that would find it difficult to raise dividends or buy back more
stock.
Moreover, though the government is trying to protect the nation
from another recession by forcing U.S. banks to be healthy and
strong in terms of capital, this could force them to withdraw their
investments from European countries. If this happens, the crisis in
Europe will deepen further and backfire on our economy. So the
long-term result could be a catch-22 situation.
On the other hand, while the government has been closely
monitoring bigger banks and has even extended help through various
simulative programs, many smaller banks are still struggling to
stay afloat. The government should set policies so that all the
industry participants contribute to the overall profitability.
If most of the major banks pass the stress tests with their
money power, the domestic economy will recover in leaps and bounds.
But in their scurry to succeed, the banks could be tempted to
manage funds immediately by liquidating their investments in weak
countries. This would end up in a fiasco, an economic disaster that
no one wants.
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BANK OF AMER CP (
BAC
): Free Stock Analysis Report
CITIGROUP INC (
C
): Free Stock Analysis Report
GOLDMAN SACHS (
GS
): Free Stock Analysis Report
JPMORGAN CHASE (
JPM
): Free Stock Analysis Report
WELLS FARGO-NEW (
WFC
): Free Stock Analysis Report
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