This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Bank 'Stress Test' Twist May Damp Buybacks, Dividends

NEW YORK ( TheStreet) - Banks should not have trouble passing the Federal Reserve's stress tests in early 2013, but investors who expect more aggressive buybacks and dividend plans should tone down their expectations.

The central bank will conduct its annual Comprehensive Capital Annual Review (CCAR) "stress test" of the 19 largest U.S. banks. The purpose of the test is to assess whether banks have sufficient capital to withstand a severe shock to the economy. The Fed uses the test to determine whether banks can go ahead with their plans to deploy capital in the form of dividends and buybacks.

In recent years, banks have shored up their capital base sufficiently to "pass" the stress test, but it has not been smooth for all banks. Notably Bank of America (BAC - Get Report) and Citigroup (C - Get Report) have seen their requests for capital denied by the regulator.

In the upcoming test, banks will for the first time have the flexibility to make one downward revision to their original capital plan.

According to Bank of America Merrill Lynch analyst Erika Penala, while the "do over" reduces the risk of the banks "failing" or more technically receiving capital objections, companies might still not be particularly aggressive in their capital requests.

The analyst says a handful of management teams have suggested that overly ambitious capital return requests may cause banks to "lose credibility" with the Fed.

The regulator also plans to publish the initial and subsequent request if a downward revision occurs, which could be perceived negatively by the market.

Moreover, while the banks may have no trouble passing the "severely adverse" case in the stress test, "the inflation scenario outlined in the "adverse case" may have an unexpected impact on capital requests for 2013," according to the analyst.

The inflation scenario could be very dilutive to tangible capital, according to Penala's analysis. But it isn't clear how this will impact capital return approvals. Some management teams believe the Fed's inclusion of the measure was "purposeful" and that it might be used to make a decision on capital return.
1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
BAC $14.77 1.44%
C $46.68 0.86%
JPM $63.79 0.93%
RF $9.45 0.75%
AAPL $93.64 -0.11%


Chart of I:DJI
DOW 17,891.16 +117.52 0.66%
S&P 500 2,081.43 +16.13 0.78%
NASDAQ 4,817.5940 +42.2360 0.88%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs