When we reach a certain age, we know we should visit the doctor regularly even if we feel fine. It’s good to have an expert give us the once-over, checking our vital signs and looking for warning signs of something more serious. Before we head off for marathon training, we know we should probably stop in the doctor’s office to get their blessing.
Since the financial crisis, big banks are no different. Worries like systemic risk and prudential rules have occupied regulators since the credit collapse threatened the entire economy. On Thursday, the banks, their customers and shareholders will get the results of the financial equivalent of a physical before giving the OK for any new fiscal exercise.
While there is no treadmill involved, the Federal Reserve subjects banks to economic stress tests. It devises economic scenarios once thought nearly impossible to see how the banks balance sheets could handle them … or not. In the test results on Thursday, the central bank will decide which of the 19 largest banks are healthy enough to share more money with shareholders or go on a shopping spree. If a bank hopes to increase its dividend or buyback its stock, it first must pass Thursday’s tests.
The Federal Reserve wants to make sure the banks are healthy enough to recover if the economy takes another big hit. The banks want a clean bill of health to attract shareholders and customers.
Tom Hudson is a financial journalist based in Miami. He is the former co-anchor and managing editor of Nightly Business Report on public television.