When Lehman Brothers Holdings Inc. crashed after the impact of the sub-prime financial crisis in 2008, the financial sector was turned upside down. Regulators made a bold and smart decision to clean up the banking sector and its somewhat secretive high-risk activities.
Fast-forward nearly seven years, and the banking sector is clearly stronger and more trustworthy than it has ever been. Investors can thank the annual Federal Reserve bank stress test for this.
Fed’s Stress Test Making Banks the Safest Investment for Long-Term Investors?
The Fed’s financial crisis stress test aims to analyze the stability of the country’s largest banks with assets of more than $50.0 billion. It includes both a round one quantitative test and a round two qualitative portion.
After the rigorous testing based on the assumptions of a severe financial crisis, all but three banks passed. While all of them made it through the first round, only the U.S. units of Santander and Deutsche failed on a qualitative basis. The Bank of America Corporation (NYSE/BAC) was approved based on the acceptance of a new capital strategy by the end of September.
The financial crisis stress test is critical, as it gives investors and consumers confidence in the country’s banking system and pushes the banks to put measures in place to help avoid the mess we witnessed in 2008. The promise of the financial crisis testing is to put the various banks under the worst economic situations and see how they would fare. The assumptions under a financial crisis include severe recessions, high unemployment above 11%, plummeting home prices, and a crash in the stock market by 50%…. Read More
While it’s well known that technology has led the broader stock market higher, there is a safer and more conservative play for investors at this time, according to my stock analysis. Where? Investors may want to take a glance at the banking sector.
Banks have dug themselves out of the financial crater that was imposed on the group by the sub-prime debt crisis back in 2007, which sent the global economy and banks into a massive tailspin, as is well represented in my stock analysis.
But that was then. As my stock analysis indicates, the banking sector has been rallying over the past seven years, beefing up their balance sheets, cutting risk, and creating a much stronger overall structure.
The chart of the Philadelphia Bank Index below shows the upward move of bank stocks from their 2009 and 2011 bottoms. Bank stocks staged a nice rally, but retrenched from March to May 2012 on the European bank concerns and Moody’s downgrade of the sector. However, the group has since staged a rally back to above the index’s 50- and 200-day moving averages (MAs), as my technical stock analysis indicates.
Chart courtesy of www.StockCharts.com
What has helped to drive the banks upward on the charts, based on my stock analysis, has been the recovering global economy and the rules set in place to help prevent excessive risk among bank stocks. At the core of the changes was the establishment of the “Volcker Rule,” which was economist and ex-Fed chairman Paul Volcker’s move to cap the speculative trades and risk banks are allowed to assume. Since these changes were put in place, … Read More