19 November 2019
The Federal Reserve said the process has motivated the big banks to achieve healthy capital levels and improve their capital planning processes. Photo: AFP
The Federal Reserve said the process has motivated the big banks to achieve healthy capital levels and improve their capital planning processes. Photo: AFP

Fed gives big US banks green light for buyback, dividend plans

The Federal Reserve has approved plans from the 34 largest US banks to use extra capital for stock buybacks, dividends and other purposes beyond being a cushion against catastrophe, Reuters reports.

The Fed said on Wednesday those lenders, including household names like JPMorgan Chase & Co. and Bank of America Corp., had passed the second, tougher part of its annual stress test. The results showed that many have not only built up adequate capital buffers, but improved risk management procedures as well.

One bank, Capital One Financial Corp., must resubmit its scheme by year-end, though the Fed is still allowing it to go forward with its capital plan in the meantime, the news agency said.

Fed Governor Jerome Powell, who is acting as regulatory lead for the US central bank, said the process “has motivated all of the largest banks to achieve healthy capital levels and most to substantially improve their capital planning processes”.

Altogether, banks that went through the tests will be able to pay out 100 percent of their projected net income over the next four quarters, compared with 65 percent after last year’s results, a senior Fed official said.

It would be the first time since the 2008 financial crisis that banks return at least as much money to shareholders as they produce in annual profit.

The verdict marks a significant victory for the banking industry, which has worked for years to regain its stature. The green light could also serve as a watershed moment for Wall Street, which is eager to get a lighter regulatory touch from policymakers in Washington.

After the Fed’s announcement, banks began to release details on how they plan to use their extra capital. Apart from Capital One, bank stocks rose in after-hours trading.

Citigroup Inc. won a particularly notable victory, gaining permission to return nearly US$19 billion to shareholders, or about 125 percent of projected earnings over the next four quarters – a big bump from last year, and more than analysts had expected.

Capital One must resubmit plans because it did not appropriately account for risks in “one of its most material businesses”, the Fed said.

Concerns centered around internal controls and whether senior management and the bank’s board of directors would be informed about problems in a timely and appropriate way, the Fed official said.

This year was the first time all banks undergoing stress tests passed, although it was also the first time most were excluded from the “qualitative” component that Capital One failed. Only 13 of the 34 lenders were subject to that part, which bankers have criticized as being too opaque and subjective.

In response to those complaints, the Fed has now started to give banks more specific details on why they fail or where they need to improve, even if they sail through the tests.

Although all the banks passed, some came close to missing a key financial hurdle known as the supplementary leverage ratio in the toughest part of the exam. 

That metric fell to as low as 3.1 percent at Goldman Sachs, just above the required minimum of 3 percent. JPMorgan, Morgan Stanley and State Street Corp. also reported ratios below 4 percent.

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