Fed stress tests explained

Synopsis

The Federal Reserve releases the results of stress tests for 33 of the largest US Bank holding companies. All banks pass the quantitative phase, known as deast, indicating they have sufficient Capital to endure a severely adverse scenario, which this year includes a hypothetical doubling of unemployment to 10% and negative interest rates. On Wednesday, the qualitative phase, called ccar, evaluates banks' risk management and governance. The results show that 31 banks, including Bank of America and Citigroup, have their Capital plans approved. However, Deutsche Bank and Santander fail the tests for the third and second consecutive years, respectively. Morgan Stanley receives a warning regarding its internal risk management. Overall, banks are expected to return $96 billion to shareholders, with Citigroup tripling its dividend. Despite the positive results, banks face challenges as interest rate hikes are unlikely to occur soon, impacting their net interest margins.