The Federal Reserve Thursday dealt a blow to J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., citing weaknesses in their "stress test" capital planning that could hamper their funneling more dividends and share buybacks to investors.
The central bank also denied capital plans submitted by BB&T Corp. and Ally Financial Inc. But the Fed at the same time cleared 14 other banks to boost payouts to shareholders, including Citigroup Inc. and Bank of America Corp., both of which in past years had capital requests rejected by the central bank.
The Fed also approved a reduced repurchase plan from American Express Co., in the only instance of a bank winning approval for a plan resubmitted to the regulator under a new stress-test wrinkle this year.
The Fed said the results show the banking system has grown stronger since the financial crisis, in large part because banks and securities firms are paying out less than they did before the 2008 meltdown.
The actions underscore the government's increased role in the banking sector since the financial crisis. Regulators over the last few years have pushed banks to build up capital buffers and improve risk management to more realistically account for potential losses.
"The financial crisis showed not only that regulators needed to increase capital requirements and conduct regular tests, but also that firms need strong internal processes to evaluate their own capital needs based on their individual risks and circumstances," Fed governor Daniel Tarullo said in a statement.
The annual tests are a way for the Fed to gauge how the banking system would fare in the face of a significant economic shock. Originally conceived as a way to convince investors and the public that the largest banks could survive the financial crisis, the exercise has become a measuring stick for banks hoping to reward their shareholders.
The results released Thursday take into account individual banks' plans for share buybacks and dividend payments and how an institution's capital buffers would shift during a recession or other market dislocation.
While the Fed indicated that J.P. Morgan, the nation's largest bank by assets, and Goldman could likely withstand a sharp economic downturn with adequate capital cushions, a senior Fed official said there were concerns about the banks' ability to adequately estimate losses in the face of severe economic event.
J.P. Morgan said it had received approval to buy back $6 billion of common stock and raise its quarterly dividend by 8 cents to 38 cents a share, beginning in the second quarter. But the company warned that it may have to reduce those disbursements after it submits an additional capital plan by the end of the third quarter.
James Dimon, J.P. Morgan's chairman and chief executive, said the company was "fully committed to meeting all of the Fed's requirements."
Goldman said it will resubmit its plans for using its capital to the Fed by the end of the third quarter, as required, and make some "enhancements to its test process."
"We are pleased to continue to have the flexibility to return capital to shareholders," said Chairman and Chief Executive Lloyd C. Blankfein.
Analysts said the Fed's action shows continuing unease with the risks posed by giant financial firms despite their capital raising in recent years, thanks in part to public uproar over the 2008 government bailouts of large firms.
"Too big to fail continues to be a big issue," said Frederick Cannon, director of research at KBW. "I think the fed is comfortable with big banks with a lot of loans. They get that. It's the big banks with the huge trading and derivative trading books they seem to be struggling with."
Bank of America said it plans to repurchase up to $5 billion of common stock and redeem about $5.5 billion in preferred stock. It didn't ask for an increase to its dividend, which is currently a penny. Executive Brian Moynihan said buying back shares "is the best way to continue to drive value for our shareholders."
In a reversal of last year's rejection of its capital plan, Citigroup received approval to buy back $1.2 billion of common stock through the first quarter of 2014. It will maintain its quarterly dividend at a penny a share.
Capital One Financial Corp. will raise its dividend to 30 cents a share from five cents, its first increase since slashing the dividend during the financial crisis.
American Express won approval after revising its plans, following a Fed rejection of its initial request to raise its dividend by three cents to 23 cents a share and buy back $4.7 billion of shares by the end of the year. Ultimately, AmEx requested the same dividend increase but cut its buyback request to $3.2 billion through the end of this year.
The Fed also rejected BB&T's initial plans but let the company keep its dividend at 23 cents. BB&T will resubmit its plan "as soon as feasible," and said last week it had re-evaluated its calculations of its capital ratios.Alan Zibel and Andrew R. Johnson contributed to this article.
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