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Bank Crisis Avoided as Banks Pass Annual Stress Test

Miguel A. Rodriguez
Miguel A. Rodriguez
30 June 2023

News that 23 US banks passed the stress test pushed bank stocks up and helped the Dow Jones 30 index to end the day in positive territory. US first- quarter GDP shows a robust economy. 

US banks pass annual stress test

Yesterday, the stress test that included a scenario with a 10% increase in unemployment and a significant decline in the value of commercial real estate was successfully completed by 23 US banks. The danger of a banking crisis has now been removed due to this news, which also provides the Federal Reserve (Fed) free reign to keep hiking interest rates.

The banks are expected to announce their share buyback and dividend payment plans after the markets close on Friday

Bank stocks rise on the news

Stocks of banks soared after this announcement. Shares of Wells Fargo & Company increased by 4.6%, JPMorgan Chase & Co. by 3.5%, Goldman Sachs Group, Inc. by 3.1%, and Bank of America Corp. by 2.3%.  

The Dow Jones 30 index increased as a result of the banking sector's strong performance, and unlike the other two major indices, closed the day in the green.

Despite this, banks may adopt a more cautious credit policy as a result of regulators, including the Fed, tightening regulatory and capital requirements in response to the failure of numerous regional banks this year. This may have a negative effect on economic growth numbers.

US economy is even stronger than expected

However, the most recent estimate of the US first-quarter Gross Domestic Product (GDP) came in at 2.0%, significantly higher than the 1.4% forecast. These figures, along with the somewhat lower-than-expected initial claims for unemployment benefits of 239,000, indicate that the US economy is stronger than predicted and is expected to prompt the Fed to keep tightening monetary policy.

Rise in treasury bond yields and the US Dollar

Due to this, Treasury bond rates increased yesterday, with the 2-year bond reaching a level of 4.87%, which is already very close to the highs reached at the start of March.

This caused the Dollar to strengthen against all its peers, pushing USD/JPY to fresh year highs at 144.90.

Additionally, gold, which has an inverse relationship with the value of the Dollar, dropped below $1,900 per ounce, marking its lowest price in the previous two months.  

The Personal Consumption Expenditure, the inflation indicator that the Fed pays the most attention to, will be released today. This data will tell investors about the direction of inflation and, consequently, the Fed's next interest rate decisions.

DMO 30.06.2023 graph.png

Gold monthly chart. Sources: Bloomberg, Reuters

Key Takeaways

  • Bank crisis seems to have been avoided after banks pass stress test
  • Bank stocks rose on the news, taking the Dow Jones 30 index into positive numbers at the end of the day
  • Lenders may be more conservative with their credit policy now as regulators may tighten capital rules
  • Jobless claims and US first-quarter GDP point to a strong economy
  • Treasury bond yields and the Dollar surged
  • Personal Consumption Expenditure is to be released today

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Miguel A. Rodriguez
Miguel A. Rodriguez

Miguel worked for major financial institutions such as Banco Santander, and Banco Central-Hispano. He is a published author of currency trading books.