The Fed Needs to Pass Its Own Stress Test

The largest U.S. banks have just cleared the first hurdle of this year’s Federal Reserve stress tests, demonstrating that they have enough loss-absorbing capital to survive a hypothetical crisis. Now, investors are waiting to hear how much of that capital the banks will be allowed to pay out in the form of dividends and stock buybacks.

They should be careful what they wish for. If banks disburse much more than they have been, they will start chipping away at the bedrock of the financial system.