All but four of 19 major US banks got a green light on Tuesday from the US Federal Reserve to boost their dividends and take other steps that will make their stocks more attractive to investors. The Fed declared them strong enough to survive a downturn worse than the Great Recession.
The Fed’s findings signaled its confidence that the financial system, which nearly collapsed three-and-a-half years ago, is healthy again.
JPMorgan Chase, Wells Fargo and other large bank holding companies that passed the Fed’s so-called stress tests raised their dividends and announced plans to buy more of their stock. The news ignited a late-day rally on Wall Street. The Dow Jones industrial average shot up 218 points to its highest close since the end of 2007.
“It’s clearly good news — the US banking system can now withstand a quite severe recession without falling over,” said Douglas Elliott, a fellow at the Brookings Institution, a non-partisan policy think tank.
One notable exception was Citigroup, the nation’s third-largest bank. It was among the companies the Fed said lacked enough capital to withstand another severe economic and financial crisis. Its stock price fell 3 percent in after-hours trading. The Fed announced the results after markets had closed.
The other three financial institutions that did not pass the Fed’s hypothetical stress tests were Ally Financial, SunTrust and MetLife.
The Fed released the results two days earlier than planned after JPMorgan Chase sent out a press release on late Tuesday saying it had passed the test.
The Fed reviewed the balance sheets of 19 bank holding companies to determine whether they could withstand a severe crisis: unemployment at 13 percent, stock prices falling 60 percent over two years and home prices plunging 21 percent from today’s levels.
The overall financial system is much stronger than it was in 2009. In the first quarter of that year, the 19 companies stress-tested by the Fed held US$420 billion in cash and assets easily convertible to cash. That figure climbed to US$759 billion by the end of last year.
The Fed didn’t order any of the banks that failed its test to raise specific sums. However, it won’t allow them to increase dividends or buy back shares, and it told them to submit plans within 30 days outlining how they plan to get stronger.
Citigroup Inc said in a statement that it plans to keep paying out its quarterly dividend of US$0.01 a share.
Insurance company MetLife Inc said it was “deeply disappointed” with the Fed’s findings. It had previously announced plans to free itself from the Fed’s oversight by selling off its bank division.
SunTrust Banks Inc said it would maintain its quarterly dividend, now at US$0.05 a share. In a statement, bank executives indicated SunTrust’s finances are solid and said they expect first-quarter profits to top Wall Street’s estimates.
Ally Financial Inc, the former GMAC Bank, was the worst performing bank in the Fed’s test. The US Treasury still owns 74 percent of the bank. Ally protested the Fed’s stress tests, saying that the analysis overstated the potential mortgage risk in its portfolios.
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