The Stress Tests

Federal regulators administered a new round of stress tests to major U.S. financial institutions this week, and the results were, for the most par, highly encouraging. JP Morgan's results were so positive that the bank promptly went out and launched a $15 billion stock buyback plan and raised its dividend by a nickel. The big loser was Citibank, which had its bid for a buyback plan rejected on account of falling short of some capital requirements.

So what were these stress tests? Basically, the regulators simulated another financial crisis or a return to a recessionary economy, and noted the amount of capital the banks would then have on hand. The idea is that banks should still have enough money to lend businesses in an economic downturn, so we don't suffer through the kind of credit freeze that exacerbated the last recession.

It turns out that the previous round of stress tests helped the banks get through this one much more healthily. As a reult of the earlier tests, lenders were asked to raise an additional $75 billion in capital, while no funds had to be raised after the most recent round. All told, the regulators found that banks had increased their Tier 1 common capital - reserves kept on hand in order to absorb losses - by 81 percent.