By Emily Stephenson and Peter Rudegeair
WASHINGTON/NEW YORK (Reuters) - Auto lender Ally Financial Inc (NYS:ALLY PR B) moved a step closer to paying back the U.S. government on Friday after the Federal Reserve approved the company's 2013 capital plan.
With the Fed's approval, Ally can proceed with a private share sale it had announced in August.
The lender said on Friday it was increasing the size of the sale by 50,000 shares and expected to receive approximately $1.3 billion from investors, up from 166,667 shares and $1 billion announced previously.
Proceeds from the sale will help it make a $5.9 billion payment to the government, which had extended the bank a $17.2 billion bailout during the financial crisis.
In March, the Fed turned down Ally's proposed capital plan which was part of the "stress test" regime to weigh how financial firms would weather a crisis. Regulators can prevent a bank from buying back shares or paying dividends if they think those steps would pose risks to the firm's stability or if they take issue with the bank's capital planning process.
The former General Motors (GM) lending arm was required to submit a new plan for Fed approval. It was the only bank that failed to meet the minimum threshold of a 5 percent capital buffer under one of the Fed's scenarios.
Ally has struggled to recover from the mortgage meltdown. Last year, it put its troubled home loan subsidiary Residential Capital LLC into bankruptcy to stanch the bleeding from bad mortgages.
Ally also in August announced an agreement with the U.S. Treasury to spend $5.9 billion to repurchase the government's outstanding preferred securities and buy special rights the Treasury held to receive extra payments should the company sells stock below a particular price.
After all those transactions close, Ally will have repaid the Treasury about $12.3 billion of the $17.2 billion it had borrowed.
Regulators had already approved a revised capital plan from BB&T Corp (BBT.N), after the Fed initially rejected that bank's plan as well.
(Reporting by Emily Stephenson and Peter Rudegeair; editing by Krista Hughes, G Crosse)