A practice that started because of the Great Recession has continued through the pandemic. It is the once-a-year financial check-up of the biggest banks in the country. The results are important to underpin confidence in the financial sector. For shareholders of these banks, the stress tests determine if they will be rewarded with bigger dividend payouts and stock buybacks.
Investors will learn the results of the latest tests after the closing bell on Thursday in the week ahead.
Last year, all of the 19 banks tests received passing grades. Still, the Federal Reserve’s prescription was to pause buying back shares and limit dividends. After all, the COVID-19 pandemic was raging, there were no vaccines yet, and the U.S. economy had just experienced its sharpest contraction on record. Late last year, after a second round of tests, the Fed eased its limits, but still restricted dividends and share buybacks.
If the central bank drops those limitations, expect several banks to announce dividend increases before the sun goes down Thursday.
This check-up on the financial resiliency of the biggest banks comes as the banks are awash in money. JPMorgan Chase CEO Jamie Dimon said his bank has stockpiled $500 billion in cash. He’s waiting for interest rates to creep higher before putting that money to work in the economy. And he expects inflation to be “more than transitory,” he said at a commercial real estate conference last week.
For those banks receiving a strong bill of financial health on Thursday, pressure will build for them to return some of their cash to shareholders. Shares of big banks like JPMorgan Chase, Bank of America and Wells Fargo have far outperformed the S&P 500 so far this year. Investors have been betting on a healthy check-up.©2021 Miami Herald. Visit at miamiherald.com. Distributed by Tribune Content Agency, LLC.