FORTUNE -- Banks have mostly been tight-lipped about what rising interest rates would mean for their bottom lines. They will soon have to open up a little more to regulators and investors.
For the first time this year, the Federal Reserve is requiring the nation's 18 largest banks to submit mid-year stress tests, showing how they would perform if they were hit with a negative economic shock, like a spike in unemployment or interest rates. The results are due to the Fed by July 5th. Unlike the bank stress tests conducted at the beginning of the year, though, the Fed will not run its own test, or publicly critique the results. However, the banks will be required to make the results public at the end of September.
Bankers are meeting with Fed officials behind closed doors next week in Boston to discuss the stress tests. There has been some contention over the process in the past. Bank executives have expressed frustration that the Fed won't say how it gets its results. At a similar conference last year, Wells Fargo's (WFC) treasurer, Paul Ackerman, reportedly drew applause from bankers when he said he still didn't get how the Fed's loss estimates could be so different than his bank's.
On the list of topics for this year's meeting are residential loans, corporate loans, and so-called counterparty credit risk, which is how much money a bank could lose if one of its trading partners goes bust. Putting a figure on that is one of the fuzziest parts of stress testing. In the past few months, regulators have stepped up scrutiny of corporate lending, questioning whether banks have made too many "covenant-light" and leverage loans.
But rising interest rates are sure to come up. The yield on the 10-year Treasury bond has been rising recently, after being stuck near historic lows ever since the recession. The Fed included a sharp rise in interest rates as one of the shocks banks could face when it calculated potential trading losses in the stress tests that were released in March. That was the first time the Fed had done that.
What's more, bankers say the Office of the Comptroller of the Currency has recently been questioning banks about interest rate risk. Last year, the OCC included rising interest rates in its report of top risks for banks.
It's hard to know how much banks would lose. Generally, banks have stuck to positives. Higher interest rates would allow the banks to charge more for loans. That could boost lending revenue and profits. But at the same time higher interest rates, and falling debt prices have, in the past, caused big losses for the banks in their bond and loan portfolios. Banks have been less outspoken about that part of the rising interest rate story. But that might be changing.
At an investor conference last week, Bank of America CFO Bruce Thompson indicated that the bank could lose as much as $11 billion in its bond and loan portfolio if interest rates were to rise 1%. He said that was as much as three times what Bank of America (BAC) would gain from higher rates in its lending business. But the bank might not have to realize those losses immediately, or ever, if it holds the debt and borrowers end up paying. Still, the bank's capital could fall, which is something both investors and regulators have watched closely since the financial crisis, and something that would show up on the bank's stress test.
The best of times, worst of times story banks are telling about rising interest rates could end up being the other way around.
Federal Reserve officials dinged JPMorgan and Goldman for being off on their stress test results. Wells Fargo, however, got a pass.
FORTUNE -- It pays to be the teacher's pet, even when you are bad at sucking up.
Shortly after the Federal Reserve released the results of its recent stress test last week, Wells Fargo said in its own report that it had no idea how the Fed came up with its MOREStephen Gandel, senior editor - Mar 19, 2013 11:45 AM ET
Goldman Sachs and JPMorgan get the go-ahead from the Federal Reserve for their capital plans - but with conditions.
Correction: March 15, 3:55 PM.
FORTUNE -- The Federal Reserve approved the capital plans of 16 of the nation's 18 largest banks on Thursday as part of the final leg of their required stress tests.
Ally Financial, the former finance arm of General Motors (GM), and BB&T (BBT), a regional bank based in Winston-Salem, MOREStephen Gandel, senior editor - Mar 14, 2013 6:49 PM ET
The Federal Reserve bank stress test suggests a Goldman risk measure may be misleading.
FORTUNE -- In the last year or so, Goldman Sachs executives have tried to portray their firm, often seen as a Wall Street swashbuckler, as a lot less risky than it used to be. The Federal Reserve appears not to be convinced.
We'll get a better idea of what the Fed thinks on Thursday after the market closes, MOREStephen Gandel, senior editor - Mar 14, 2013 5:00 AM ET
Federal Reserve says 17 of the nation's 18 largest banks could survive a severe economic meltdown.
FORTUNE -- In its annual stress test of the nation's largest banks, the Federal Reserve estimated that these firms would lose $462 billion dollars if the economy were to enter another recession similar to the one we just had.
Despite those losses, though, the Fed says nearly all of these banks would survive.
Of the 18 banks MOREStephen Gandel, senior editor - Mar 7, 2013 4:32 PM ET
Love them or hate them, the Fed crew are the rare breed in Washington that aren't just looking out for Number One.
FORTUNE -- We have an unfortunate tendency in this country to treat people as either heroes or villains, with no gradations in between. Take Fed chairman Ben Bernanke. He's being called exceptionally vicious names by right-wing types for supposedly undermining our currency and planting the seeds for future inflation -- MOREAllan Sloan, senior editor-at-large - Mar 21, 2012 5:00 AM ET
The Fed's test proved the banks could survive another downturn, as long as the next downturn looks like the last.
FORTUNE -- Nearly three years ago I wrote a story saying the Federal Reserve should make bank "stress tests" an annual event. Now that it seems they have, I am not sure how wise my advice was.
On Tuesday, the Fed said that the nation's largest banks would be able to weather MOREStephen Gandel, senior editor - Mar 14, 2012 10:53 AM ET
Banks are still using the just trust us method to value hundreds of billions of dollars of assets left over from the financial crisis.
FORTUNE -- The stress tests, which are expected to be released by the Federal Reserve next week, will likely show that banks are better prepared for a financial crisis than they were three years ago. The tests are also likely to show the banks haven't abandoned the MOREStephen Gandel, senior editor - Mar 5, 2012 11:27 AM ET
As a thrifty export powerhouse, Germany often puts the United States to economic shame.
But don't despair: its bankers are every bit as irresponsible and politically powerful as ours.
That's why German banks and their supposed masters are lobbying the European Banking Authority to weaken the stress tests that are due out in coming months. Their sauerbraten is that the EBA is trying to make banks hold higher-quality capital to ensure that shareholders, rather than taxpayers, MOREColin Barr - Jun 6, 2011 2:52 PM ET
It's back to the drawing board for Bank of America.
BofA (BAC) said Wednesday the Federal Reserve "indicated that it objected" to the bank's plan to raise its dividend in the second half of 2011. The decision clearly surprised the bank, whose CEO Brian Moynihan has been saying the biggest U.S. bank by assets expected to boost payouts along with most of the other big banks.
BofA didn't say specifically what the MOREColin Barr - Mar 23, 2011 9:43 AM ET
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