Initial Results From The Fed's 'Stress Test' Coming Thursday

The Federal Reserve will release round one of its annual "stress test" on Thursday, which evaluates how financial entities will cope under various hypothetical scenarios.

The full results of the test will be released the following Wednesday. Naturally, this is of greater significance and determines if a bank can boost its dividend payout to shareholders.

The test consists of two parts, the first examines if the company is holding sufficient capital to shield themselves from a severe economic crisis. Second, the test evaluates if the companies maintain sufficient internal processes to identify and measure risks.

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According to the Wall Street Journal, banks could end up spending millions of dollars to comply with the stress test and achieve a satisfactory outcome. However, since the hypothetical parameters change every year, last year's success does not guarantee a similar outcome this year.

Thirty-three (33) financial institutions will be evaluated this year, up from 31 a year ago.

The Federal Reserve argues that the test forces the companies to adjust to a changing regulatory environment while protecting themselves from any potential financial shock.

"The Fed would prefer the firms not simply try to check the box for having met regulatory expectations, but rather have broader improvements in their capital planning capabilities," the Wall Street Journal quoted Mike Alix, a partner at consulting firm PwC and a former official at the Federal Reserve Bank of New York as saying. "There needs to be continuous improvement — no firm should rest on its laurels."