March 2015: Forget Spring Break … the stress test results are in!!!

This month we finally got to learn the results of the much-anticipated Federal Reserve’s comprehensive stress testing programs, DFAST` (Dodd-Frank Act Stress Test) and CCAR (Comprehensive Capital Analysis and Review). The tests were designed to restore confidence in the US financial system after the government had to provide a $700bn (£459bn) bailout package to stabilize hundreds of banks during the global financial crisis in 2008.

DFAST supervisory stress test is a forwards looking quantitative evaluation of the impact of adverse stressful economic and financial market conditions on Bank Holding Companies. All 31 US banks passed the first hurdle in the Federal Reserve’s latest round of annual “stress tests” to see how they would cope in the next economic crisis. The central bank said the banks had enough capital to keep lending during a severe global recession. Wow, we can sleep at night now!!!

This was the first time since the tests began in 2009 that all banks had a capital level above the minimum amount. But some Wall Street giants were among the worst performers. Goldman Sachs, Morgan Stanley and JP Morgan Chase were among the five banks with the lowest readings for a capital ratio of at least 5%.

The CCAR evaluates a BHC’s capital adequacy, capital adequacy process and its planned capital distributions such as dividend payments and common stock repurchases. The Fed evaluates whether the institution has sufficient capital to continue operations throughout times of economic and financial market stress. The important factor though is that the Fed may object to a capital plan based on either quantitative or qualitative grounds – and we all know that the Banks have focused on the quantitative aspect don’t we!!!

The Fed announced it has not objected to the capital plans of all relevant bank holding companies participating in the Comprehensive Capital Analysis and Review (CCAR). One institution received a conditional non-objection based on qualitative grounds, and the Federal Reserve objected to two firms’ plans on qualitative grounds.

The Federal Reserve did not object to the capital plan of Bank of America Corporation, but is requiring the institution to submit a new capital plan by the end of the third quarter to address certain weaknesses in its capital planning processes. The Federal Reserve objected to the capital plans of Deutsche Bank Trust Corporation and Santander Holdings USA on qualitative concerns. The Federal Reserve did not object to any plans based on quantitative grounds.

So the rumors were true about Deutsche and Santander. Round 2 again goes to Compliance. Seconds out … Round 3

Dark Pools? Are these the same as Black Holes?? Ok, so hands up. Who actually had heard of a Dark Pool? Well following the revelations in 2014 about the ‘opaque transparent’ share dealing practices of leading Investment Banks we are all none the wiser. At least the New York attorney attempted to throw some light on the matter (pardon the puns!!!)

Apparently 40% of US Equity trades go through dark pools. Apparently dark pools are private exchanges and information on trades is not publically available. Apparently high frequency traders don’t trade through dark pools. Apparently ….. everyone was doing it.

Well the interesting part is that these dark pools are not new! They have been around since the late 1980’s.They also come in many different flavors:

Broker dealer A
gency broker or Exchange owned
Electronic market makers

For more insight into this mysterious world its worth reading Michael Lewis’s book “Flash Boys: A Wall Street Revolt” although they are not represented in a good light (pardon the puns!!!) So having discovered this we now find exchanges have dark and light pools. May the force be with you…