Aurelia Butler

WASHINGTON (Reuters) – The U.S. Federal Reserve is due to release the results of its annual bank health checks on Wednesday at 4:30 p.m. ET (2030 GMT). Under the “stress test” exercise, the Fed tests big banks’ balance sheets against a hypothetical scenario of a severe economic downturn, the elements of which change annually.The results dictate how much capital those banks need to be deemed healthy and how much they can return to shareholders via share buybacks and dividends. This year, big U.S. lenders are once again expected to show they have ample capital to weather any fresh turmoil in the banking sector.WHY DOES THE FED ‘STRESS TEST’ BANKS?The Fed established the tests following the 2007-2009 financial crisis as a tool to ensure banks could withstand a similar shock in future. The tests formally began in 2011, and large lenders initially struggled to earn passing grades.Citigroup, Bank of America, JPMorgan Chase & Co, and Goldman Sachs Group (NYSE:GS), for example, had to adjust their capital plans to address the Fed’s concerns. Deutsche Bank’s U.S. subsidiary failed in 2015, 2016 and 2018.However, years of practice have made banks more adept at the tests and the Fed also has made the tests more transparent. It ended much of the drama of the tests by scrapping the “pass-fail” model in 2020 and introducing a more nuanced, bank-specific capital regime.HOW ARE BANKS ASSESSED NOW?The test assesses whether banks would stay above the required 4.5% minimum capital ratio – which represents the percentage of its capital relative to assets – during the hypothetical downturn. Banks that perform strongly typically stay well above that. The nation’s largest global banks also must hold an additional “G-SIB surcharge” of at least 1%.How well a bank performs on the test also dictates the size of its “stress capital buffer,” an additional layer of capital introduced in 2020 which sits on top of the 4.5% minimum.That extra cushion is determined by each bank’s hypothetical losses. The larger the losses, the larger the buffer.THE ROLL OUTThe Fed will release the results after markets close. It typically publishes aggregate industry losses, and individual bank losses including details on how specific portfolios – like credit cards or mortgages – fared.The central bank typically does not allow banks to announce their plans for dividends and buybacks until a few days after the results. It announces the size of each bank’s stress capital buffer in the subsequent months.The performance of the country’s largest lenders, particularly JPMorgan, Citigroup, Wells Fargo & Co, Bank of America, Goldman Sachs, and Morgan Stanley, are closely watched by the markets.TEST IN LINE WITH 2023The Fed changes the scenarios each year. They take months to devise and test a snapshot of banks’ balance sheets at the end of the previous year. That means they risk becoming outdated.In 2020, for example, the real economic crash caused by the COVID-19 pandemic was by many measures more severe than the Fed’s scenario that year.After the failures of mid-size lenders Silicon Valley Bank, Signature Bank (OTC:SBNY) and First Republic last year, the Fed was criticized for not having tested bank balance sheets against a rising interest rate environment, and instead assuming rates would fall amid a severe recession.This year’s test is broadly in line with the 2023 test, with the hypothetical unemployment rate under a “severely adverse” scenario rising 6.3 percentage points compared with 6.4 last year. STRESSES IN COMMERCIAL REAL ESTATEThe exam also envisages a 40% slump in the prices of commercial real estate, an area of concern over the past two years as lingering pandemic-era office vacancies and higher for longer interest rates stress borrowers.In addition, banks with large trading operations will be tested against a “global market shock,” and some will also be tested against the failure of their largest counterparty.For the second time, the Fed is also conducting “exploratory” shocks to banks. This year’s test also includes additional exploratory economic and market shocks which won’t help set capital requirements, but will help the Fed gauge whether it should broaden the test in the future. The market shocks will apply to the largest banks, while all 32 will be tested on the economic shocks.Fed Vice Chair for Supervision Michael Barr has said multiple scenarios could make the tests better at detecting banks’ weaknesses.WHICH BANKS ARE TESTED?In 2024, 32 banks will be tested. That’s up from 23 last year, as the Fed decided in 2019 to allow banks with between $100 billion and $250 billion in assets to be tested every other year.These are the banks being tested in 2024:Ally Financial (NYSE:ALLY) American Express (NYSE:AXP)Bank of America Corporation (NYSE:BAC) The Bank of New York Mellon (NYSE:BK) Corporation Barclays US LLCBMO Financial Corp. Capital One Financial Corporation (NYSE:COF)The Charles Schwab Corporation (NYSE:SCHW)CitigroupCitizens Financial (NYSE:CFG) Group, Inc.Credit Suisse Holdings (USA)DB USA CorporationDiscover Financial Services (NYSE:DFS) Fifth Third Bancorp (NASDAQ:FITB)Goldman Sachs Group, Inc.HSBC North America Holdings Huntington Bancshares (NASDAQ:HBAN)JPMorgan Chase & Co. (NYSE:JPM)KeycorpM&T Bank Corporation (NYSE:MTB)Morgan Stanley Northern Trust Corporation (NASDAQ:NTRS)The PNC Financial (NYSE:PNC) ServicesRBC US Group Holdings LLC Regions Financial Corporation (NYSE:RF) Santander (BME:SAN) Holdings USA State Street Corporation (NYSE:STT)TD Group US Holdings LLCTruist Financial (NYSE:TFC) CorporationUBS Americas Holding LLCU.S. BancorpWells Fargo & Company (NYSE:WFC) More

WASHINGTON (Reuters) – Big U.S. lenders are expected to show they have ample capital to weather any renewed turmoil during this week’s Federal Reserve health checks, but will be conservative on investor payouts amid economic and regulatory uncertainties, analysts said.The central bank on Wednesday will release the results of its annual bank “stress tests” which assess how much cash lenders would need to withstand a severe economic downturn and how much they can return to investors via dividends and share buybacks. The results come a year after three large banks failed and as higher Fed interest rates continue to squeeze regional lenders’ margins and their commercial real estate (CRE) portfolios. Weakening consumer demand has also dampened sentiment on the trajectory of the economy. With more mid-sized banks in the mix this year, the tests should provide fresh insight into the health of those lenders.Introduced following the 2007-2009 financial crisis, the annual exercise is integral to banks’ capital planning. The results will also likely fuel Wall Street banks’ campaign to ease draft capital hikes proposed by the Fed, which they say are unnecessary because big banks are already flush with cash. Bank groups will be scouring Wednesday’s results for evidence that boosts their case, while being cautious on payouts since big dividends and buybacks could hurt banks’ argument that extra capital demands would impede their capacity to lend. “The stress test could be used as a proxy battle in the overall capital regulatory reform war,” said Ed Mills, an analyst at Raymond James. “There could be some increase in returning capital to shareholders but it is expected to be modest as capital norms are yet to be finalized.” This year 32 lenders will be tested. Wall Street giants JPMorgan Chase (NYSE:JPM), Citigroup, Bank of America, Goldman Sachs, Wells Fargo and Morgan Stanley usually attract the most scrutiny. Citi and Goldman, as well as smaller lender M&T Bank (NYSE:MTB), are expected to perform well due to changes in their balance sheet mixes, said analysts at Keefe, Bruyette & Woods (KBW). With some lingering investor jitters about regional banks, mid-sized lenders including Citizens, KeyCorp (NYSE:KEY) and Truist are likely to be in the spotlight too, as will Discover Financial Services (NYSE:DFS), whose compliance problems helped make it a takeover target. “KeyBank is well capitalized with strong credit quality and deposit profiles,” a bank spokesperson said, adding Key also has a moderate risk profile with a wide range of funding sources. Spokespeople for Wells Fargo, Citi, Morgan Stanley, Truist and M&T Bank declined to comment while Goldman Sachs, JPMorgan, Citizens and Discover did not respond to requests for comment.CRE EXPOSUREThe industry has performed well in recent years, although some critics say the tests are too easy. The Fed faced criticism after the 2023 bank failures for not having probed lenders’ ability to withstand higher rates, for example.Analysts expect all 32 banks will show capital in excess of regulatory minimums. Last year, the central bank found the 23 banks tested would suffer a combined $541 billion in losses in a severe economic downturn, but that would still leave them over twice the capital required under Fed rules.This year’s test is similar in its severity, but includes around 10 banks that are tested less frequently. The Fed’s 2024 “severely adverse” scenario envisages the unemployment rate jumping 6.3 percentage points, compared with 6.4 points in 2023, to a peak of 10%. It includes sharper declines in the stock and bond markets this year, but slightly less severe dips in home prices and the overall economy.As with 2023, the test also envisages a 40% slump in CRE prices, an area of concern as lingering pandemic-era office vacancies and high rates continue to stress landlords.How well a bank performs dictates the size of its stress capital buffer (SCB) – an extra cushion of capital the Fed requires banks to hold to weather the hypothetical economic downturn, on top of regulatory minimums needed to support daily business. The larger the losses under the test, the larger the buffer.Piper Sandler and KBW analysts predict that SCBs will mostly be flat across the group, although KBW expects Citi’s will fall after the bank sold most of its international consumer loans and that Goldman’s will likewise decline thanks to lower exposure to equity and real estate investments. M&T Bank’s efforts to reduce its CRE exposure should also result in a smaller SCB, said KBW.KeyCorp and Truist, meanwhile, could experience an increase in their SCBs from a hypothetical hit to their income, KBW said. Christopher Wolfe, head of North American banks ratings at Fitch, said investors will be watching how banks’ CRE loans perform. “The banks have been keeping aside reserves of up to 10% for the office loan portfolio and CRE will be a focus but mainly for regional banks compared to large lenders,” he said. More

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U.S. stock futures edged higher Monday, starting the last week of the first half of the year near record highs, largely boosted by the enthusiasm surrounding artificial intelligence. By 04:20 ET (08:20 GMT), the Dow futures contract was 70 points, or 0.2%, higher, S&P 500 futures climbed 12 points, or 0.2%, and Nasdaq 100 futures rose by 45 points, or 0.2%.The S&P 500, a broad-based benchmark index, hit a new intraday record late last week, and is up almost 15% so far this year, while the tech-heavy Nasdaq Composite has gained almost 18%. The blue-chip Dow Jones Industrial Average has lagged, by contrast, gaining just under 4% in the first half of the year. The main focus this week will be Friday’s release of the May personal consumption expenditure data, the Federal Reserve’s preferred inflation gauge.Investors have been trying to gauge when the U.S. central bank will start cutting interest rates, with Fed officials expressing their desire for more inflation data confirming the easing of prices before agreeing to a reduction.There are also a number of key companies earnings this week, including FedEx (NYSE:FDX), Micron (NASDAQ:MU), Walgreens Boots Alliance (NASDAQ:WBA) and Nike (NYSE:NKE).Apple (NASDAQ:AAPL) has run into regulatory difficulties in the European Union.The European Commission, which also acts as the EU antitrust and technology regulator, said Monday the iPhone maker’s App Store rules breach EU tech rules because they prevent app developers from steering consumers to alternative offers.The EU executive said it was also opening an investigation into Apple over its new contractual requirements for third-party app developers and app stores.”None of these business terms allow developers to freely steer their customers. For example, developers cannot provide pricing information within the app or communicate in any other way with their customers to promote offers available on alternative distribution channels,” the EU watchdog said.The EU opened an investigation into the U.S. tech giants in March under a landmark new law known as the Digital Markets Act.So-called anti-steering rules were one of the big areas of focus of the probe. Under the DMA, tech firms are not allowed to block businesses from telling their users about cheaper options for their products or about subscriptions outside of an app store.Chinese technology firm ByteDance is working with U.S. chipmaker Broadcom (NASDAQ:AVGO) to develop an advanced artificial intelligence processor, even as the U.S. is attempting to restrict the export of these vital chips to its main economic rival. A deepening of the partnership between the two companies, which Reuters reported on Monday, represents more efforts by Chinese technology firms to secure the supply of advanced AI chips, after the U.S. blocked several major chipmakers, most notably NVIDIA Corporation (NASDAQ:NVDA), from selling their most advanced AI technology to China.The 5 nanometre chip will be compliant with U.S. export curbs and is likely to be outsourced for manufacturing to TSMC, the world’s biggest contract chipmaker.Bytedance and Broadcom already have partnerships in place, with the TikTok owner having purchased several AI-linked chips from the firm over the past couple of years.This follows a broad push into generative AI over the past year, which has served as a major source of demand for global chipmaking firms.China and the European Union have agreed to start talks on the planned imposition of tariffs on Chinese-made electric vehicles (EVs) being imported into the European market.The European Commission announced earlier this month that it is planning to impose provisional duties on EVs produced in China of up to 38.1%, on top of its standard 10% tariff for car imports.The duties are due to apply by July 4.The news prompted the ire of Beijing, with Chinese authorities hinting at the  possibility of retaliatory measures.The state-aligned Global Times newspaper reported on Sunday that China wants the European Union to revoke its decision to impose provisional tariffs on Chinese electric vehicles.While the talks hint at the possibility of a de-escalation of this trade conflict, the United States also hike tariffs on Chinese cars in May, suggesting coordination in the West’s trade war with Beijing.Intervention talk is on the rise in foreign exchange markets Monday, after the Japanese yen weakened to its lowest level against the dollar since April 29 earlier Monday, with the USD/JPY pair climbing to a high of 159.93.In April the pair touched a 34-year low of 160.245, leading to Japanese authorities spending roughly 9.8 trillion yen to support the currency.The yen has come under renewed pressure after the Bank of Japan’s  decision this month to hold off on reducing bond-buying stimulus until its July meeting. The yen losses prompted Japan’s top currency diplomat Masato Kanda to say on Monday that authorities will take appropriate steps if there is excessive foreign exchange movement.”We will firmly respond to moves that are too rapid or driven by speculators,” Kanda said, while noting that the authorities have no specific levels in mind on when to intervene.Kanda said that the addition of Japan to the U.S. Treasury’s foreign exchange manipulation monitoring list had “absolutely no impact” on Tokyo’s policy options.A U.S. Treasury report issued last week added Japan to its foreign exchange monitoring list alongside six countries that were on the previous list. 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