19 October 2018
Citigroup Inc. earned Fed approval for its capital plan after failing the stress test last year. Photo: Reuters
Citigroup Inc. earned Fed approval for its capital plan after failing the stress test last year. Photo: Reuters

Big US banks struggle to pass Fed stress test

Four of the biggest American banks barely passed a stress test by the Federal Reserve — and only after ensuring some wiggle room in their capital ratios.

The United States central bank allowed Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley to distribute income to investors only after they moved to ensure their capital levels stay above the minimum requirement, the Wall Street Journal reported Thursday.

Bank of America Corp. received conditional approval after the Fed cited “certain weaknesses” including its ability to measure losses and revenue.

That cleared the way for the bank to temporarily reward investors by boosting dividends or share buybacks but the firm must submit a revised plan by Sept. 30.

If the Fed is not satisfied with the bank’s progress, it can freeze the capital distributions.

Citigroup Inc. earned Fed approval for its capital plan, a major victory for chief executive Michael Corbat who made passing the exam with “some reasonable amount of capital return” a top goal after the firm in 2014 after the firm failed for the second time in three years.

Corbat had said he would step down if the firm failed again this year.

“Our capital plan review helps ensure that the capital distribution plans of large banks will not compromise their ability to continue lending to businesses and households even during a period of serious financial stress,” Fed governor Daniel Tarullo, the central bank’s point man on regulatory issues, said in a statement.

The Fed rejected the capital plans of the US units of Deutsche Bank A.G. and Banco Santander S.A., for “qualitative” deficiencies including ability to model losses and identify risks.

The two firms must resubmit revised capital plans and suspend any increased dividend payments to their parent firms or other shareholders but can continue to pay dividends at last year’s level.

This year’s test, which gauged whether banks could keep lending during periods of severe economic stress, went straight to the heart of Wall Street’s trading operations, a factor that appears to have contributed to the difficulty big banks had in passing.

The 2015 “severely adverse” scenario included assumptions of corporate defaults, a steeper decline in stock prices and greater market volatility than in years past, producing relatively higher losses for banks heavily engaged in capital markets activities like buying and selling equity and debt instruments, Fed officials said.

Goldman, Morgan and J.P. Morgan all have large trading operations.

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