Bank stocks are the cornerstones of an investment portfolio for many investors. That’s because people and businesses rely on the banking industry in order to keep the economy running.
But not all bank stocks are created equal, as was evidenced after the recent financial crisis. Between 2008 and 2014, more than 500 U.S. banks were forced to shut their vaults.
To prevent a similar event from happening again, banks with assets of more than $10.0 billion must now undergo a regular stress test. Stress tests are a regulatory tool used, in the U.S., by the Federal Reserve to measure a bank’s ability to withstand a crisis. The more capital a bank has, the less it relies on borrowed money, a source of funding that can evaporate in a crisis.
If the bank’s capital falls below a certain threshold—it fails the test and has to take immediate action to make up the necessary capital. Those that fail the stress test cannot increase their dividend payments or initiate share repurchase programs. Most importantly, banks that fail the stress test are seen as risky investments.
Passing the stress test, on the other hand, bolsters confidence in bank stocks. In fact, bank stocks with solid underlying financials can be some of the best long-term plays.
Some of the strongest bank stocks in the world are outside of the U.S. In North America, Canadian banks dominate, taking positions one through six. The top publicly traded Canadian bank stocks include: The Toronto-Dominion Bank (NYSE/TD), Royal Bank of Canada (NYSE/RY), Bank of Nova Scotia (NYSE/BNS), Bank of Montreal (NYSE/BMO), and Canadian Imperial Bank of Commerce (NYSE/CM).
You may remember an article I wrote in June of this year (we got lots of comments on it) about my Dad receiving a letter in the mail telling him that if the cash portion of his stock brokerage balance fell below $125,000, he would be charged a yearly fee of $500.00 to keep his account open. (See “About That Letter My Dad Got in the Mail Friday.”). Read More
We all know that interest rates are eventually heading higher. It might be in 2014, but more likely not until 2015, when the unemployment rate can decline to 6.5% as the Federal Reserve believes.But one thing for sure is that interest rates are headed higher. (Read “Small-Cap Stocks the Place to Be—If Economic Growth Is Real.”). Read More
The major bank stocks all closed off 2012 near their respective 52-week highs. An upside break appears to be in the works, as the banking industry continues to assume less risky businesses, while shoring up their balance sheets and producing stronger units.The subprime credit crisis that surfaced in 2008 and drove the U.S. and the global. Read More
The damage done from job losses over the past few years has been quite severe. I think the biggest problem going forward is the realization that the economy, during the past decade, was artificially inflated due to easy monetary policy; therefore, many of the industries were operating far above fundamentally sound levels.One of these. Read More
The last two years have obviously been extremely difficult for bank stocks. The financial crisis that took hold of not only America but the rest of the world as well has caused extreme strain across the entire financial sector. However, since the financial crisis several years ago, American banks have substantially shifted their risk. Read More