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These 4 Banks Failed the Fed’s Doomsday Scenario

Fifteen out of 19 of the largest U.S. banks passed the Federal Reserve’s stress test, which measures their ability to maintain adequate capital levels in a recession scenario in which they continue paying dividends while buying back stock. In 2009, about half of the banks failed the test. The test results, which were announced late Tuesday, show that banks have raised profits, rebuilt capital, and increased liquidity to better protect themselves in the event of another economic downturn.

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Before the Fed’s release, JPMorgan Chase said it would raise its dividend by 20 percent and authorized a $15 billion share repurchase plan after the central bank tested its capital. Wells Fargo and U.S. Bancorp also plan to raise dividends and buy back shares, but in a major setback to Citigroup’s efforts to restore investor confidence, the Fed rejected the bank’s request to raise its dividend and expand its buyback. Though Citigroup passed the stress test, the Fed indicated that it would fall short of some capital requirements if it boosted the payouts.

While 18 out of the 19 financial firms tested by the Fed retained a large enough capital buffer to continue lending in a steep downturn, in which housing prices and stock markets tumble sharply and unemployment climbs to 13 percent, the Fed said at least 4 in 19 — including Ally Financial , MetLife , and SunTrust Banks , and Citigroup — would have to resubmit their capital plans, which essentially amounted to a rejection of their dividend or stock-buyback plans. Ally Financial was the only bank to fall short of the test’s capital requirements even without any proposed dividend payments or other capital distributions. After revising their plans, Citigroup, MetLife, and SunTrust could get approval to return some capital to shareholders.

None of the 19 banks were forced to immediately raise capital in a sharp contrast to the first round of stress tests in 2009, in which lenders were required to raise $75 billion. Citigroup issued a statement saying that it hit capital targets, assuming it didn’t increase its dividend or share buybacks.  The Fed only objected to the firm’s Capital Plan, and Citigroup will be allowed to submit another later this year. Bank of America also passed this year’s test, but didn’t ask for any buyback or dividend increase after having its request rejected last year in a major embarrassment for the bank.

In releasing the results of its stress tests, the Federal Reserve said that the 19 biggest financial firms raised their “Tier 1 common capital”  by 81 percent since the first stress tests in 2009. The Fed also said the banks paid out as dividends less than half as much of net income last year as in 2006. The results of the stress tests suggest the unpopular bailouts of 2008 and 2009 may have actually helped stabilize the banking system during the financial crisis.

Citigroup, Ally Financial, and SunTrust fared worst under the hypothetical shock — their minimum Tier 1 common capital ratios would hit lows of 4.9 percent, 2.5 percent, and 4.8 percent, respectively — and together with MetLife, were the only banks whose capital plans weren’t approved by the Fed. Meanwhile, State Street , Bank of NY Mellon , Fifth Third , Capital One , PNC Financial , KeyCorp , Goldman Sachs , Regions Financial , American Express , Morgan Stanley , BB&T , Bank of America, Wells Fargo, U.S. Bancorp, and JPMorgan all had their proposed dividend payouts and share repurchase programs approved after passing their stress tests with flying colors.

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To contact the reporter on this story: Emily Knapp at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com