Ben Bernanke and his team wanted to assure that in the latest round of stress tests, nineteen US banks would analyze their balance sheets scrupulously and under the most adverse conditions.
Specifically, the United States Federal Reserve included in its stress test a catastrophic scenario for the US economy. The scenario factors in a 13% unemployment rate (a 21% drop from current levels), an 8% contraction of the GDP. Even this extremist view does not strike fear in the hearts of financial sector leaders. It is expected that financials on the S&P 500 will finish this year with better dividends than in 2008.
The US Central Bank is approaching its stress tests from circumstances that are very different than those of its European counterparts. While European banks continue to generate doubts as regards how sustainable their balance sheets are considering their need to raise capital and meet the European Banking Authority's capital requirements, predictions indicate that the four major US banks, besides Goldman Sachs, will notably increase their dividends in 2013.
Big Expectations
Experts from the US central bank have used up to twenty-five distinct variables for their stress tests, including economic growth projections, fluctuations in US Treasury bond prices, housing prices and inflation.
On the New York Stock Exchange, the birth of capitalism par excellance, the euphoria is evident. "I really like financials. I think that with the latest stress test results, the banks are going to become one of the top industries in the US this year," said Kenneth Polcari, investment director from ICAP Equities.
For now, recommendations from major banks already show the confidence that the major analysis shops have about the strength of the industry. So strong are their views that among the ten biggest banks in the United States, half of them have earned a buy recommendation and nobody is recommending selling positions in any bank, which is a frequent bit of advice for European banks. Just one example: advisers tend to recommend selling all Spanish banking stocks.
