Bank of America’s stock rose more than 3.8 percent during trading Friday, after the bank posted a better improvement Thursday on its latest “stress test” than some of its big-bank peers.
Investors sent the Charlotte bank’s stock higher as a sign they believe the Federal Reserve will allow the lender to return more capital to shareholders based on its performance in the tests. The Fed will make that announcement on Wednesday.
The Federal’s annual tests measure whether the biggest banks can maintain various minimum capital ratios under a hypothetical economic downturn. One of the more closely watched of all the ratios is for top-tier capital. The Fed looks to see whether banks can maintain a minimum ratio of 5 percent for that kind of capital.
Under a hypothetical “severely adverse” downturn, Bank of America posted a minimum of 7.1 percent, more than a percentage point higher than the minimum it posted a year ago. The improvement was better than that of the other three largest U.S. banks:
▪ Citigroup recorded an improvement of exactly 1 percentage point, to 8.2 percent from 7.2 percent.
▪ JPMorgan Chase & Co.’s improvement was less than 1 percentage point, to 6.5 percent from 6.3 percent.
▪ Wells Fargo recorded a minimum of 7.5 percent, down nearly 1 percentage point from 8.2 percent.
Bank of America shares closed Friday at $16.21, up 1.31 percent. Wells Fargo, JPMorgan and Citigroup all fell, as major stock indexes were also down.
All 31 bank holding companies that were tested met the 5 percent minimum in this year’s test.
The exams, required under the Dodd-Frank financial reform law, are designed to determine whether large lenders have enough capital to keep operating in another recession.
The tests are made of two parts. Part one took place this week.
On Wednesday, in part two of the tests, the Fed will announce whether it will object to banks’ proposed plans to return capital to shareholders, such as through stock repurchases or dividend increases. If banks’ capital plans cause their capital levels to fall below minimum requirements, the Fed will object to them.