US banks, Fed stress test will affect dividends and buy backs

TThe Federal Reserve is ready to announce the outcome of the stress tests on the balance sheets of the 32 largest US banks, up from 23 last time after the inclusion of some medium-sized groups (but small regional institutions, in crisis because of their exposure to the real estate sector, remain outside the test).

The outcome of the stress tests, which will be announced tonight after the closing of the markets, is particularly awaited on Wall Street because the banks' capital strength will determine their upcoming buy-back and dividend plans. Starting with market leader JP Morgan, which may decide to increase its payout when presenting its second-quarter accounts on 12 July.

However, the outcome of the stress tests, at this stage, is not the only factor that will affect policies for distributing profits to shareholders. A major role will also be played by the new Basel III rules, which the Fed, well behind Europe, is expected to resubmit to Congress by July. The Federal Reserve has pledged to enact a lighter version, in terms of capital increases, than the one presented a year ago.

Until regulatory capital ratios are made official, financial analysts say, US banks are likely to adopt a cautious stance on payout.

The Fed's stress tests are used to measure how much capital would be burned by banks in an adverse economic scenario. Last year's examination of 23 'tested' banks revealed a theoretical total capital shortfall of EUR 541 billion. This level, however, would not have led any bank to fall below the minimum capital requirements.