What happened
Wednesday was, if not the most important day for certain banks and financial services providers in the U.S., among the top five. That's because it's when the results of the Federal Reserve's stress tests were released.
Happily for investors with assets in those sectors, all 23 institutions involved in this year's tests passed. Among these was veteran securities brokerage Charles Schwab (SCHW 0.13%), and the market rewarded the company by trading its stock more than 2% higher on Thursday. This handily beat the 0.5% rise of the S&P 500 index.
So what
Among other metrics, the Fed gauges banks' and financial services companies' capital levels in addition to their leverage. It then judges whether such institutions would be able to weather several different degrees of sudden and sharp economic decline. Schwab, like the 22 other companies undergoing the tests, made the grade.
The fact that all banks and financial services providers passed their tests was comforting and relieving enough, but that good feeling was compounded by the fear that gripped the industry in the spring.
Following the high-profile collapse of several banks, investors worried that small- and mid-level financial institutions were similarly vulnerable. In particular, they feared that an outflow of deposits for the perceived safety of larger banks would doom them.
Now what
In Schwab's case, it had a notably high level of unrealized bond losses, as bonds are the assets it tends to park its client deposits into. On the surface, this situation was alarming. However, the vast majority of those investments are small enough to be covered by the Federal Deposit Insurance Corporation (FDIC). Schwab's passing of the stress test reinforced the solid financial position it was in then and occupies now.
