Each of 31 major banks in the US passed annual stress test and would absorb hypothetical loses and still meet capital requirements. The stress test, as designed by the Fed this year, assumed that unemployment surges to 10%, commercial real estate values plunge 40% and housing prices fall 36%.
From engineering perspective, the stress test is an ongoing verification process to ensure banks’ survivability under design basis accidents. A favourable test result suggests that these financial institutions are eligible for stock buybacks and more dividend distributions. Overall the sector is cheaper compared with others. The suppression of their valuations since 07/08 financial crisis remains true and I see that as an opportunity.