Fed Looks to Issue Another Round of Stress Tests

The Federal Reserve announced that it plans to once again analyze the top nineteen U.S. banks in attempts to gauge the healthiness and capacity of the banking system. The banks will be required to "submit capital plans by early next year showing their ability to withstand losses under a set of conditions, including 'adverse' economic conditions and continuing realestate-related woes." The banks were evaluated under a similar stress test in 2009 during the peak of the financial crisis.

The Fed's efforts are part of a greater initiative to enhance government oversight within the industry. The Fed will not only be checking up on the the bank's capacity to handle a crisis but more importantly ensuring that banks have tightened their lending standards on commercial and consumer loans. If banks are up to par, the Fed has set up requirements that will allow banks to raise dividends or buy back stock. But banks will only be given the go ahead if they "have the capital cushions in place to withstand losses over the next two years and demonstrate an ability to satisfy new, tougher, global capital requirements."

Hopefully, additional government oversight within the industry will provide more of a safety net for banks and their consumers. As banks become more stable, hopefully consumer confidence with in the industry will grow. Interestingly enough, the article points out that while "J.P Morgan, Wells Fargo, PNC Financial Services, and U.S. Bancorp are expected to be amount the first to be allowed to raise dividends," Bank of America and Citigroup apparently have "more hurdles" ahead. This further warrants our Wells Fargo investment recommendation. However, I have to wonder why the Fed believes BofA and Citi will not be up to par.

Source: http://online.wsj.com/article/SB10001424052748704648604575620732161392908.html?mod=WSJ_Banking_leftHeadlines