Eighteen months after the Federal Reserve stress tested the nation's largest banks for survival, it's back for round two.
The 19 largest banks will be stress tested again by the first quarter of 2011 in what the Fed calls the latest step "to enhance supervision of banking organizations." In conjunction, it also released guidelines for banks looking to raise dividends or increase share buybacks.
The guidelines for the test fall into three parts:
- Test banks' ability to withstand losses over the next two years under several scenarios. If structured like the first stress test, this means normal, bad, and really bad.
- Test banks' ability to meet the new Basel III international capital requirements (more on that here).
- Confirm whether banks still owe taxpayers money as part of the TARP bailout of 2008.
Why is this great news for banks? Because all the big names, including Citigroup
First, if the new stress test is anything like the 2009 version, testing for possible future losses is almost a non-issue. The first test's "really bad" scenario assumed unemployment would never break above 8.9%. It was only a matter of weeks after the test was completed before unemployment surpassed that level. Regulators make these tests embarrassingly easy to pass, lest the results spook markets.
Second, all major banks currently meet the Basel III requirements. By a mile. Some think Citigroup and B of A are still in too precarious a position to pay dividends, but the jury is still out. Odds are they can, but whether they will is up for debate.
Third, they've all repaid TARP. Taxpayers still own some Citigroup common stock, but that's a matter of the Treasury being slow to sell, not anything in Citigroup's control. Plus, since taxpayers still own common shares, they'd directly benefit from potential Citi dividend payouts.
Bottom line: Expect at least some big banks to resume dividend payouts in the near future. Mark that down as a win for shareholders.
Fool contributor Morgan Housel owns shares of Bank of America preferred. The Fool owns shares of Bank of America and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.