Banks have complained that regulators have unduly required banks to pile on capital that they could use to lend to small business and homeowners. The required capital buildup has also squeezed the industry’s profits, which can cut into bankers’ pay and bonuses.
Thursday’s results are very likely a good harbinger for next week’s even more consequential test, when Fed officials will decide whether to approve the banks’ plans to pay dividends and repurchase shares.
Wall Street analysts expect that those payouts will increase this year — a big plum for investors who have gone through nearly a decade of lagging stock prices. Bank stocks, which rallied sharply in the wake of President Trump’s election victory, are for the most part off the highs they reached earlier in the year.
The Federal Reserve analyzes the banks’ soundness by running their actual loans and other assets through a series of scenarios that would lead to huge losses.
This year’s fictional challenges for 34 banks included unemployment of about 10 percent and commercial real estate losses of 35 percent.
The Fed governor overseeing this year’s tests is Jerome H. Powell, a Republican former private equity executive appointed by President Barack Obama in 2011.
Although the criteria for the stress tests are reviewed and approved by the entire Board of Governors, Mr. Powell has made it clear that some rules need to be adjusted now that the banks are well capitalized.
On Thursday, Mr. Powell testified before the Senate Banking Committee that for certain banks, the Fed should consider phasing out the qualitative portion of the test — which measures the less mathematical aspects of a bank’s business, like its internal controls and its capital planning process. The banks will undergo the qualitative aspect next week.