What’s a week without a good chance that the Federal Reserve will roil the stock market?
On Thursday June 25, the Federal Reserve will release results of its annual bank stress tests on June 25. At stake will be bank plans for dividend payouts. Banks that don’t pass the tests or where bank capital is skirting near the minimum required to ride out an economic shock won’t get Fed approval for their plans to pay dividends. European regulators have already banned banks for paying dividends for the next year.
The stress test is different this year because of the coronavirus pandemic. The test, according to Fed Vice Chair Randal Quarles, will run banks up against three possible economic scenarios to see how they perform in this period of high uncertainty about the economy. On scenario will will see how banks perform in a rapid V-shaped recovery, where the economy rebounds rapidly. Another will assume a slower U-shaped recovery where only a small share of economic activity is regained in 2020. And a third will be based on W-shaped recovery where a short-lived recovery is followed by another deep drop in economic activity later in 2020.
Banks have argued, no surprise, that they have already retained enough capital after voluntarily halting share buybacks to continue dividends.
The stress tests will be run on the adjusted end of 2019 balance sheets of 34 banks and will include big drawdowns in 2020 of corporate credit lines.
The stress tests are an especially big deal for bank stocks that pay significant dividends. JPMorgan Chase (JPM) shows a dividend yield of 3.64% as of the close on Friday, June 19. Bank of America (BAC) sports a yield of 2.88%. Morgan Stanley (MS) comes in at 2.94%. Citigroup (C) is at 3.85%. And Wells Fargo’s current yield is 7.40%.