By Michael R. Crittenden and Dan Fitzpatrick
WASHINGTON--The Federal Reserve said Thursday that 17 of the 18
largest U.S. banks could weather a sharp economic downturn with
adequate buffers against losses, potentially clearing the way for
billions of dollars in higher dividend payments and larger share
buybacks.
Fed officials caution that the results of the annual "stress
tests" don't indicate a clear "pass" or "fail," since they don't
incorporate the latest dividend and share-buyback plans. Individual
banks received their stress test results midday Thursday, as well
as partial information on the Fed's analysis of their capital
plans. The banks then had individual conference calls with the
central bank, according to a person who participated in one of the
calls.
Banks are seeking to reward investors following several years of
uneven stock performance following the financial crisis. The
central bank has said it won't disclose its official decision on
the capital plans until March 14.
Thursday's results show banks have bounced back since being at
the center of the worst financial crisis since the Great
Depression, bolstered by billions in taxpayer bailouts and
balance-sheet improvements forced by regulators.
Still, the results show the largest would still face substantial
losses in a steep downturn, the Fed estimated. Bank of America
Corp. would lose $51.8 billion between late 2012 and the end of
2014, largely on bad loans. J.P. Morgan Chase & Co. would lose
$32.3 billion, and Citigroup Inc. would lose $28.6 billion.
Some of the same giants with a large presence on Wall Street
also would be left with lower capital cushions due to their sizable
trading books and huge piles of nonperforming loans. Morgan
Stanley, Goldman Sachs Group Inc, J.P. Morgan Chase and Bank of
America scored lowest in one key measure of capital. Smaller rivals
such as BB&T Corp., Fifth Third Bancorp, PNC Financial Services
Group Inc. and U.S. Bancorp emerged from the test with considerably
higher capital stockpiles.
One smaller bank, Ally Financial Inc., scored lowest in that key
capital measure largely because of its association with troubled
mortgage lender Residential Capital LLC. Ally has placed the lender
in bankruptcy, but the Fed assumed that Ally was still on the hook
for its liabilities since the outcome of the bankruptcy isn't
final.
Bank of New York Mellon Corp., State Street Corp., and American
Express Co. were the strongest firms as measured by their core
capital buffer against losses, known as the Tier 1 common capital
ratio.
Fed officials have stressed that a bank could do well in the
first round of tests and still not receive approval next week. The
regulator made its calculations based on average dividend payouts
in recent quarters.
"Significant increases in both the quality and quantity of bank
capital during the past four years help ensure that banks can
continue to lend to consumers and businesses, even in times of
economic difficulty," Fed Gov. Daniel Tarullo said in a
statement.
Started in 2009 as a way to convince investors and the public
that the largest banks could survive the financial crisis, the
annual stress tests are a way for the government to gauge the
health of banks by measuring their ability to deal with economic
shocks
There is a growing chorus of concern from lawmakers and former
regulators that many of these banks remain "too big to fail" and
would again be rescued by the government as in 2008. While the
results show most of the banks are significantly healthier than
they were at the peak of the crisis, it's unlikely to quell calls
from both sides of the aisle to consider reducing the size or
complexity of some firms.
Under this year's tests, banks' loan and securities portfolios
are subjected to a range of hypothetical economic scenarios. The
most dire calls for a severe recession where peak unemployment hits
12.1%, and envisions a sharp slowdown in China's economy that
reverberates throughout the developing Asian economies.
In a key change from last year, banks will have the ability to
alter their proposed capital plans after seeing Thursday's results.
The Fed added this mulligan period into the process after last
year's tests to respond to concerns from the industry. A bank
worried that it could face a rejection of its capital plan has 48
hours to resubmit a reduced proposal to the Fed.
This is the third straight year the Fed is expected to allow
banks to raise dividends and buy back shares, which the government
had largely prohibited in the first few years after the crisis to
ensure that lenders preserve enough capital to weather turbulent
times. Regulators forced banks to slash their dividends in exchange
for billions of dollars in government aid, and banks were
prohibited from raising payouts without U.S. approval.
Banks including Wells Fargo & Co. and J.P. Morgan Chase have
been open about their requests to increase their dividend and buy
back stock in 2013. For Citigroup and Bank of America, two weaker
giants that had requests rejected in recent years, any approval
would likely add a jolt of confidence to their shares.
The Fed's decision to release the stress test results and
capital plan decisions a week apart has sparked confusion among
bank executives and ratcheted up tension between the firms and the
central bank. Bank representatives last week used a conference call
with Fed officials to push for a one-day release of results,
expressing concern about market volatility and the potential for
shareholder lawsuits if banks accidentally run afoul of securities
laws.
The Fed has stood its ground, with officials noting that the two
release dates are necessary if banks want to maintain the option of
reducing their capital plans before the Fed makes a final
decision.
Bankers were still debating Thursday how much they would say
following private afternoon conference calls with the Fed, where
they received both the stress test results and the initial analysis
of their capital distribution plans. The Fed did not provide bank
officials with its qualitative assessment of banks' internal risk
measurement and management practices, which could be used by
regulators to reject a capital plan.
Most banks said ahead of the announcement they expect to release
their own internal stress test results while withholding any
private communication from the Fed about their capital plans. At
the same time, they said if other banks go public with the Fed's
private discussions, they will likely follow.
The Fed told banks last week in a two-page document that they
can't release the initial results of their capital requests unless
"you have been provided a preliminary indication that is required
by a securities law to disclose.
Write to Michael R. Crittenden at michael.crittenden@wsj.com