WASHINGTON/NEW YORK: The Federal Reserve has approved plans from the 34 largest US banks to use extra capital for stock buybacks, dividends and other purposes beyond being a cushion against catastrophe.
On Wednesday, the Fed said those lenders, including household names like JPMorgan Chase & Co and Bank of America Corp, had passed the second, tougher part of its annual stress test.
The results showed that many have not only built up adequate capital buffers, but improved risk management procedures as well.
One bank, Capital One Financial Corp, must resubmit its scheme by year-end, though the Fed is still allowing it to go forward with its capital plan in the meantime.
Fed Governor Jerome Powell, who is acting as regulatory lead for the US central bank, said the process “has motivated all of the largest banks to achieve healthy capital levels and most to substantially improve their capital planning processes.”
Altogether, banks that went through the tests will be able to pay out 100 per cent of their projected net income over the next four quarters, compared with 65 per cent after last year’s results, a senior Fed official said.
It would be the first time since the 2008 financial crisis that banks return at least as much money to shareholders as they produce in annual profit.
The verdict marks a significant victory for the banking industry, which has worked for years to regain its stature.
The green light could also serve as a watershed moment for Wall Street, which is eager to get a lighter regulatory touch from policymakers in Washington.
After the Fed’s announcement, banks began to release details on how they plan to use their extra capital.
Apart from Capital One, bank stocks rose in after-hours trading.
Citigroup Inc won a particularly notable victory, gaining permission to return nearly $19 billion to shareholders, or about 125 per cent of projected earnings over the next four quarters — a big bump from last year, and more than analysts had expected.
Capital One must resubmit plans because it did not appropriately account for risks in “one of its most material businesses,” the Fed said.
Concerns centred around internal controls and whether senior management and the bank’s board of directors would be informed about problems in a timely and appropriate way, the Fed official said.
The Fed did not identify which business was ill-prepared.
Capital One’s most significant business is credit card lending.
It has also built up a presence in auto lending.
Both areas have been flagged by bankers and analysts as showing signs of weakness lately.
Capital One has until year-end to deliver an improved submission.
— Reuters
Oman Observer is now on the WhatsApp channel. Click here
