(Bloomberg) -- U.S banks are facing the toughest stress test in years, even after the Trump administration promised to free the industry from some of its most burdensome regulations.
Banks will have to prove they can survive a steeper stock-market crash, a worse housing crisis and a bigger economic contraction as the Federal Reserve conducts its annual review of their finances -- a key step toward higher buybacks or dividends -- regulators
said Thursday.
Under the 2018 test, banks will have to show they have enough capital to withstand a U.S. economic contraction of as much as 8.9 percent. The worst point in tests for the past three years didn't exceed 7.5 percent. Likewise for stocks: This year's test envisions a 65 percent market crash, versus a meltdown of just 50 percent in recent years.
The tougher stress test heads in the opposite direction from President Donald Trump's push to ease rules governing the industry, though U.S. regulators do plan to soften some restrictions governing leverage, according to people familiar with the matter.
“A more benign regulatory backdrop is a relevant part of the investment story for financials,” UBS Group AG analysts led by Saul Martinez said in a report. “However, the more stringent parameters around a severely adverse scenario might suggest that the Fed is increasing the bar for expanding capital returns from existing elevated levels.”
Even with the higher bar, banks will probably continue to increase their payout ratios, the UBS analysts said. After years of building up their capital buffers, the biggest banks were allowed to return significantly more cash to their shareholders after last year's stress test.
To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.
To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Steve Dickson, Steven Crabill
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