The U.S. central bank will release stress test results assessing banks' capital resilience in severe economic downturn scenarios on Wednesday. Big U.S. banks are reportedly expected to demonstrate sufficient capital to withstand banking sector turmoil in Federal Reserve stress tests.
The tests influence banks' capital planning, determining cash return to shareholders through dividends and share buybacks.
Following this year's banking crisis, smaller lenders like Capital One (NYSE: COF), U.S. Bancorp (NYSE: USB), and Citizens (NYSE: CFG), alongside Wall Street giants like Citigroup Inc (NYSE: C), Bank of America Corp (NYSE: BAC), JPMorgan Chase & Co (NYSE: JPM), Goldman Sachs Group Inc (NYSE: GS), Wells Fargo & Co
WFC (NASDAQ: WFC), and Morgan Stanley (NYSE: MS), are under the spotlight.
Despite the challenging nature of the tests, analysts and executives anticipate that the 23 banks being tested will show capital levels above regulatory requirements.
Citing the analysts, Reuters noted that impending new capital hikes and uncertainty over the economic outlook would make banks slightly more conservative about payouts this year.
Banks expected to have excess capital to return to shareholders, albeit at a slower pace than in the past.
Previous tests showed banks would sustain significant losses in severe economic downturns but maintain capital above regulatory minimums.
This year's test is even more rigorous, factoring in higher unemployment rates and a significant drop in commercial real estate prices.
Performance in the stress test determines the size of banks' stress capital buffer, an additional cushion required by the Fed to weather hypothetical economic downturns.