What to expect from today's bank stress test results

Jared, do you think this is going to give bank investors a a sigh of relief and an opportunity to enter these stocks again? Or could it play out exactly the opposite? Well, I think this is going to be a good news announcement. I mean, really, it's been a good news announcement for the last decade. The banks do extraordinary well on this. They understand the test at this point, even with the curve balls that the Fed is trying to throw with the four new exploratory scenarios here, it's hard to see how this isn't going to be, you know, if not a home run, at least a triple for the banks. So would you say then there's no event risk? In other words, this kind of, you know, and why do you think the regional banks in particular could actually be coming out the best of the budget? Yeah. So the regional banks are in a fascinating space right now. I think most of the real focus at the Federal Reserve is on the G Sibs. And the G Sibs are those giant banks, the, you know, JP Morgan's of the world, the names we all know. That's where the real focus is. Two of the exploratory scenarios only look at the G Sibs. In addition, a lot of the changes in these new capital rules that the regulators are rushing to get done before the election, they really impact those biggest banks the most and have the least impact on the regionals. Leslie, let's talk for a second about these exploratory scenarios. It basically means we're going to get more detail on on hypothetical problems the banks could face. Do you think that would that would spook people to kind of look at it in more detail? Well, the reason they're called exploratory scenarios is because they don't factor into capital levels. So it's basically, it's basically an additional test for exploratory purposes, but it doesn't have a bearing on how much capital could be returned in the form of buybacks and dividends. So it's kind of just like a, it's like an, a test for maybe extra credit. It would be the analogy we could use. But in terms of the day one price performance after these tests, Jarrett is right in that often times they do tend to create kind of an upside surprise, especially ever since they got rid of the pass fail dynamic a few years ago and replaced it with that stress capital buffer figure that I mentioned earlier. We have a a full screen that shows actually the day one price performance relative to the S&P. And each time in 2021-2022 and 2023, there were gains in the KBW bank index and gains that superseded those in the S&P 500. So we'll see if 2024 is kind of more of the same on that front. But the tests have become pretty predictable to model in certain ways. And so it's something that people are assessing well in advance of today's results. Jared, what do you think is a bigger deal? Sure, go ahead. I just want to add something on the exploratory scenarios. I certainly agree for the regional banks. I do think it could be a bigger deal for the G Sibs, particularly the two looking at essentially stagflation. The G Sibs hold the vast majority of the industry's assets. So even though we're going to get aggregate results, I do think the markets going to look at those aggregate results and really say, OK, are the examiners not going to come in for some of these biggest banks and say, you know, you need to build capital even beyond what the stress capital buffer says? Even though Leslie was saying that these are more just fanciful and not really for capital purposes, but do you think they'll still be taken as a way that that makes people say, OK, we need to have more on hand? Correct. And so it's part of the discretionary part. You know, when the examiners come in and they meet with management, that's how those results are going to be used. So they won't create the formal capital requirement, but you know, so much of banking is informal when it comes to supervision, and this will be an important part of that informal oversight.