A (Banking Industry) Look Ahead to CCAR 2014

  

NEW YORK, NY – Trepp has prepared a Look Ahead to CCAR 2014 that establishes a clear connection between earlier stress testing results and bank stock performance.

Daniel K. Tarullo

The report also predicts how the next wave of banks required to undergo these stress test will perform. This report will go out to Trepp customers late next week. A summary follows:

A statement from Federal Reserve Governor Daniel K. Tarullo this summer reminded the markets that CCAR1 supervisory stress testing will not be limited to the 18 large banks currently subject to the tests.

In his testimony before the Senate, Tarullo maintained that "this fall, we will extend the full set of stress testing requirements to the dozen or so banking organizations with greater than $50 billion in assets covered in the Dodd-Frank Act but not fully covered in our previous stress tests."2

This remark set the wheels in motion for the press to begin speculation on which banks that would include and what the results would look like.

In this brief, Trepp looks at how past stress test results have been a predictor of stock price performance, and offers thoughts on what the next round of stress test results will look like for the new banks potentially subject to CCAR.

A Look Back: What Stress Test Results Tell Us about Stock Performance

In the nearly 18 months since the 2012 CCAR stress test results were published, banks that experienced lower Tier 1 Common ratios under the Severely Adverse Scenario saw their stock prices lag relative to banks that posted higher Tier 1 Common ratios.

Equity investors may want to keep an eye on this trend as longer periods of data are available and new results are posted for additional banks.

There are several reasons for the banks’ strong relative price performance.

First, the banks’ higher stressed capital ratios indicate a better ability to weather adversity, so they have been rewarded more than their peers that aren’t as well-capitalized.

Second, stronger CCAR stress test results mean that these banks have greater flexibility in future capital planning, including potential dividend increases and stock buybacks.

Changes in the CCAR banks’ capital plans must be approved by regulators, and the results of stress testing are critical to getting those approvals.

And third, higher results can indicate more balance sheet capacity available for potential acquisitions or simply adding leverage, thereby boosting earning assets.

 For a complete copy of the company’s news release, please contact:

Eric R. Gerard

Senior Vice President

Great Ink Communications

27 Union Square West, Suite 205

New York, NY 10001

(212) 741-2977