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This Is the Bank Stress You Asked For (Update 1)

Updated with the Federal Reserve's movement of the stress test results announcement to Tuesday, JPMorgan Chase's announcement, and test results for Bank of America and Citigroup.

NEW YORK (TheStreet) -- Investors were thriled on Tuesday after JPMorgan Chase (JPM), announced it had passed the Federal Reserve's latest round of stress tests, but U.S. citizens should be proud of way the central bank is handling this regulatory role.

The Fed is required under the Dodd Frank Wall Street Reform and Consumer Protection Act to conduct an annual Comprehensive Capital Analysis and Review (CCAR) on large, complex bank holding companies.

The 19 companies required to participate in this year's CCAR submitted capital plans, including any plans to increase their returns of capital to investors through dividend hikes or repurchases of shares.

The Fed takes each company's "unique risks" into account and make sure each has "sufficient capital to continue operations throughout times of economic and financial market stress."

Most of the recent business coverage has focused on what is of the greatest concern to investors -- higher dividends and support for share prices through buybacks -- and for many of the stress tested banks, dividend increases are just around the corner. But a closer look at the Federal Reserve's testing methodology shows that the regulator is doing all of us a huge favor.

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Many of the regulatory changes springing from Dodd-Frank have been ridiculed, including the Volcker Rule, and its ill-defined ban on "proprietary trading," which is causing a talent exodus from major banks, including JPMorgan Chase as investment managers and buy-side analysts leave in droves, as the banks wind-down their private equity investing and become less competitive internationally.

Another deserving target for scorn is the farcical Dodd-Frank mandate that large banks and bank holding companies draw up resolution plans for a rapid resolution of their assets, in the event of failure. These "living wills" can't work, because in a stressed and illiquid market, there won't be any quick buyers the assets of a systemically important bank that is failing.

After Tom Brown of Second Curve Capital said in December that he had suggested to Bank of America board of directors member Chad Gifford that the company consider selling part of its branch network -- with the company's Texas operations given as an example -- as a way of showing the market that the company's assets really were worth more than the fraction of book value the stock was trading for, the Wall Street Journal on Feb. 17 reported that the company might indeed consider a Texas sale if it were to come under severe stress.

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