UPDATE 2-Fed tells JPMorgan, Goldman to improve capital plans
In a blow to two major Wall Street banks, the Federal Reserve told Goldman Sachs and JPMorgan Chase that they must fix flaws in how they determine capital payouts to shareholders, but still approved their plans for share buybacks and dividends.
The Fed said JPMorgan and Goldman would have to submit new plans by the end of the third quarter. A senior central bank official declined to identify specific problems.
In the second phase of the Fed's annual stress tests of the 18 largest U.S. banks, the regulator said on Thursday that it had approved 14 firms' capital plans without any strings attached.
The Fed vetoed submissions by BB&T Corp and Ally Financial.
The results show the Fed is keeping a tight leash on the nation's big banks five years after the U.S. financial crisis.
The annual testing has become a key tool for regulators to ensure that banks are not eating too much into their capital cushions, by examining how banks would weather a hypothetical major market shock.
Last week, in the first set of stress test results, the Fed said that without their planned capital distributions, major U.S. banks overall had enough capital to withstand a severe economic downturn.
Ally Financial was the only bank last week that failed to meet the minimum hurdle of a 5 percent capital buffer in the Fed's test, which assumed a spike in unemployment to 12.1 percent and a 50 percent drop in share prices.
The Fed also uses the tests to determine whether banks are in a position to pay out dividends or buy back shares.
The tests have become a source of tension between banks and the Fed. Some banks last week released results of their own tests, calculated using the same scenarios the Fed used. Many banks scored themselves higher than the Fed did.
The Fed reprimanded JPMorgan and Goldman based on "qualitative" concerns, not their capital ratios. That could confuse investors, said Ernie Patrikis, a former New York Fed official who is now a partner at the law firm White & Case.
"It's a strange public process because to us it all looks kosher, but the Fed is saying, 'No, it's not kosher because we know more than you do about the numbers,'" Patrikis said.
In after-market trading, shares of Goldman Sachs and JPMorgan fell 2 percent, while BB&T shares fell 3.1 percent.
The Fed said JPMorgan and Goldman Sachs each had "weaknesses in its capital plan or capital planning process that were significant enough to require immediate attention, even though those weaknesses do not undermine the quantitative results of the stress tests."
Tom Day, senior director of stress testing and capital planning at Moody's Analytics, foresaw few problems for the two Wall Street banks. "I don't expect that Goldman and JP will have anything but approval when they resubmit," he said.
The two can move forward with any plans for dividends or share buybacks, but they will have to submit new plans to the Fed at the end of the third quarter. If the Fed deems those plans insufficient, it could order the banks to halt any new capital distributions, the senior Fed official said.
"We are pleased to continue to have the flexibility to return capital to shareholders," Goldman Chief Executive Lloyd Blankfein said in a statement. The company said it would resubmit its capital plan with enhancements by the end of the third quarter.
"JPMorgan Chase is fully committed to meeting all of the Fed's requirements," CEO Jamie Dimon said in a statement.
CAPITAL PLANS
The Fed did not provide a breakdown of each bank's plans for dividends and repurchases. Some individual banks on Thursday began disclosing those details themselves.
JPMorgan said that the Fed had approved its plan to buy back $6 billion of stock over the next 12 months, subject to addressing the weaknesses found in the firm's capital planning process. JPMorgan will raise its quarterly dividend in the second quarter to 38 cents a share from 30 cents, it said.
Goldman did not disclose details of its capital plan.
Bank of America said it would buy back $5 billion in common stock and redeem $5.5 billion in preferred shares after the Fed approved its capital plan. That is considered a step forward for a bank that had its capital plan rejected in 2011 and did not ask to return more capital to shareholders in 2012.
Bank of America shares rose 4.3 percent in after-hours trade. The bank's quarterly dividend will stay at a penny per share.
American Express said it plans to increase its quarterly dividend to 23 cents per share, a 3 cent increase, and to buy back up to $4 billion in company shares in 2013.
The company had to lower its submission after the Fed concluded that under its initial plan, American Express's capital level would have dropped below the minimum requirement for at least one quarter during the hypothetical nine-quarter "stressed" period.
The Fed this year gave banks 48 hours to resubmit their plans if it appeared the initial proposal would not be approved, the first time banks got a second shot at capital distributions.
Ally Financial and BB&T will not be able to move forward with proposed capital distributions.
The U.S. government owns a majority stake in Ally, the former General Motors lending arm, after a series of government bailouts.
The Fed said it rejected Ally's capital plan "both on quantitative and qualitative grounds." Ally submitted a revised plan, but that plan was also rejected by regulators.
A senior Fed official would not disclose Ally's capital plan. Ally spokeswoman Gina Proia said the company has withdrawn a requested capital action but declined to provide details.
Ally, which has a mortgage unit in bankruptcy proceedings and is trying to sell its international businesses, has disputed the Fed's assumptions in the stress tests. Proia said the company would be positioned to pay back the U.S. Treasury once it has completed "certain milestones in its strategic plans."
The Fed said it rejected BB&T's proposal based on qualitative concerns.
BB&T, which scored above many of its peers in the stress test, said in a statement the Fed does not permit banks to disclose the reason for a capital plan rejection, but it did not believe it was related to the bank's "capital strength, earnings power or financial condition."
The Fed did not object to the continuation of its quarterly dividend of 23 cents per share and the payment of preferred dividends, BB&T said.
(Reporting by Emily Stephenson in Washington, D.C. and Rick Rothacker in Charlotte, N.C.; Additional reporting by Lauren Tara LaCapra and David Henry; Editing by Karey Van Hall and Tim Dobbyn)