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The Week Ahead: It’s Stress Test Time Again for Banks

Bank BHThe capitalization of the largest banks has been a concern since the start of the financial crisis, and the Federal Reserve wants to test the largest banks to see if they could remain capitalized enough to remain solvent during an economic downturn.

The Fed will release the results of the first of its two annual supervisory stress test exercises this week when it publishes the findings of the Dodd-Frank Act Stress Tests (DFAST) on Thursday, June 23, at 4:30 pm EST.

The results of the second round of stress testing, the Comprehensive Capital Analysis and Review (CCAR) on Wednesday, June 29. The DFAST is a complementary exercise to the CCAR that will “help assess whether institutions have sufficient capital to absorb losses and continue operating during stressful economic and financial conditions over a period of nine quarters."

The CCAR will test 33 bank holding companies with $50 billion or more in total consolidated assets. For the 2016 cycle, the CCAR will include a severely adverse global economic scenario in which “U.S. unemployment rate rises five percentage points to 10 percent, accompanied by a heightened period of corporate financial stress and negative yields for short-term U.S. Treasury securities,” according to the Fed.

Earlier in June, two Fed governors announced that the capital requirements for banks would be tougher for this year's round of stress tests. Fed governor Daniel Tarullo said that the tougher requirements include “a significant increase in capital.” Fed governor Jerome Powell said that he hopes the new requirements will “fully internalize the risk” their size poses to the economy and that he has “not reached any conclusion that a particular bank needs to be broken up or anything like that.” Instead, Powell said the Fed will “raise capital requirements to the point at which it becomes a question that banks have to ask themselves.”

Bank of America CEO Brian Moynihan told the Wall Street Journal he is confident that his bank will pass the stress tests, but at the same time, he said he thought the capital requirements may restrict lending. “We could lend more money if the capital levels were different,” he said.

JPMorgan Chase CEO Jamie Dimon said in April that his bank was so well-capitalized, it could absorb $350 million in losses without hurting the bank's solvency or ability to lend. He wrote in his annual shareholder letter, “You can see in the table below that JPMorgan Chase alone has enough loss absorbing resources to bear all the losses, assumed by CCAR, of the 31 largest banks in the United States.”

Existing-home Sales—National Association of Realtors—Wednesday, June 22

Existing-home sales defied the odds in April by overcoming inventory shortages, soaring home price appreciation, and stagnant household income growth to rise by 1.7 percent to a seasonally adjusted annual rate of 5.45 million. It was the second consecutive months of increases for existing home sales, which have been up and down over the last year.

Can they do it again and increase a third straight month? The industry will find out on Wednesday, June 22, when the National Association of Realtors releases the existing-home sales report for May 2016.

It is quite possible. Realtor.com Chief Economist Jonathan Smoke said that the two-month streak of increases has brought existing home sales in line with the seasonally adjusted pace of sales at the beginning of the year and 6 percent higher than last year. This shows that momentum is continuing from a strong start to the year as the peak months for sales approach.

Affordability is a concern despite the current ongoing low mortgage rate environment.

“The temporary relief from mortgage rates currently near three-year lows has helped preserve housing affordability this spring, but there's growing concern a number of buyers will be unable to find homes at affordable prices if wages don't rise and price growth doesn't slow,” NAR chief economist Lawrence Yun said.

Yun was still optimistic about the summer homebuying season despite the affordability concerns.

“Looking ahead, with demand holding steady and supply levels still far from sufficient, the market for entry-level and mid-priced homes will likely continue to be the most competitive heading into the summer months,” Yun said.

This week's schedule

Wednesday, June 22

FHFA House Price Index, 9 a.m. EST

Janet Yellen, Federal Reserve Chair, Semi-Annual Testimony Before the House Financial Services Committee, 10 a.m. EST

Existing-home Sales for May 2016, National Association of Realtors, 10 a.m. EST

Thursday, June 23

New Home Sales for May 2016, HUD and Census Bureau, 10 a.m. EST

Dodd-Frank Act Stress Test (DFAST), Federal Reserve, 4:30 pm EST

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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