Finals week is over on Wall Street. And it looks like it’s going to be a good summer for the big banks. All 34 of the major financial firms subject to the Fed’s annual stress test passed the second half of that exam on Wednesday — and the central bank rewarded them by approving their plans to start doling out money to shareholders.

This marks the first time since the post-crisis advent of the tests that all the participants passed. That’s a testament to the success of the exercise, which is designed to compel banks to stash more capital so they’ll have the cushion they need to weather another economic storm.

As the Fed noted in releasing the results this week, big financial firms have more than doubled that capital cushion in the years since the meltdown.

Shareholders are in line for an immediate payout. Citigroup led the way by announcing it’s doubling its quarterly dividend to 32 cents a share and pursuing a record $15.6 billion stock buyback. Other leading banks followed suit with dividend hikes and repurchase plans.

The news should also goose bank share prices, which have been mostly bobbing in place for months after going on a tear that lead the market surge following President Trump’s election.

And the results will give new ammunition to policymakers in Washington angling to loosen regulations on the industry.

The Republican deregulatory push includes relief from the tests themselves. The Financial CHOICE Act that passed the House earlier this month would require the Fed to give banks more information ahead of time about how they’ll be tested while scaling back the scope and frequency of the exams. That package is a nonstarter in the Senate, where Republicans are eyeing a more modest set of tweaks that can win Democratic support.

And Senate Democrats didn’t wait for the final results of the stress tests this week to warn against using the industry’s performance as an argument for dismantling regulation. Four of them on the Senate Banking Committee issued statements Tuesday to prebut the case. “If no one fouls out in a game, you don’t fire the referees,” Sen Sherrod Brown, D-Ohio, the panel’s top Democrat, said in a statement.

Added Sen Elizabeth Warren, D-Mass: “Passing the stress test is the minimum a big bank can do, and the banks passed in large part because of new financial rules that required them to strengthen their balance sheets. Using the stress test results as an excuse to weaken those tests or roll back the rules is pure lobbyist spin, and I’m not buying it.”

The Treasury Department’s road map for redoing Dodd-Frank rules endorses some stress-test changes similar to those in the House package, including several that regulators could accomplish on their own, with no change in the law.

And Fed watchers point to some signals from regulators — including a September speech by then-Fed governor Daniel Tarullo — that it’s open to adjusting the testing regime. But in releasing the latest results, the Fed also made clear it believes the biggest banks still have work to do to get on sound footing, noting “areas of weaknesses that fall short of meeting supervisory expectations for capital planning.”

Mike Alix, a PwC partner who helped design the tests as a senior supervisor at the New York Fed, said he doesn’t see this year’s tests transforming the debate. “This offers something for both sides: firms are getting better, so maybe they should lighten up; on the other hand, firms are better because of it,” he tells me, predicting “some technical tweaking,” though the tests are “here to stay.”

In other words, school may be out for summer, but the banks haven’t graduated.

Bloomberg-The Washington Post Sevice

Published in Dawn, June 30th, 2017