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The Stress Free - Fed Stress Test

Last week the results of the Fed Stress Test were announced and with no surprise, all of the 33 banks passed without any issues raised. This has brought joy to shareholders of these banks, as they will now be able to announce much-awaited buybacks. According to some brokerage reports top 8 banks will announce a total of $80Bn worth of buyback and dividend programs.


The stress test has estimated a loss of $612Bn in the worst-case scenario. The majority of it will be loan losses amounting to $463Bn followed by trading and counter party losses amounting to $100Bn. The rest of the losses are valuation-driven losses.


Despite such an estimate, the report mentions that the capital buffer available with banks is sufficient to absorb them. The worst impacted banks in absolute terms are Discover and Capital One with the least impacted banks being Bank of NY Mellon and State Street.


According to the results, Commercial and Industrial loans will be the largest category to be hit followed by Credit Card with a close tie between trading and commercial real estate.


Given all these facts and the current scenario where recession is being waited upon, announcing such large buyback programs will only bring a maximum of a quarter's worth of relief but it will end up reducing the capital buffer that the report is based on. Further stress would be added when Fed accelerates the asset reduction especially by selling MBS(Mortgage Backed Securities).


This report will surely come in handy soon when the actual worst-case scenarios unfold with banks having lower capital buffers turning a real-world crisis into another financial crisis. Bringing QE5 with a larger paycheque as inflation will remain high due to availability issues unresolved.

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