The Fed Singled JP Morgan And Goldman Sachs Out For Having Weak Doomsday Plans
John Carney,
Many of the biggest banks in the United States got the green light from the Federal Reserve Thursday on plans to return profits to shareholders.
Two banks, JPMorgan Chase and Goldman Sachs, got yellow lights. The Federal Reserve is requiring them to submit new plans that will address what the regulators say are weaknesses in their planning processes.
Ally Financial and BB&T Corporation had their plans rejected by the Federal Reserve.
The Federal Reserve said that fourteen had submitted plans that satisfied its tests. Those banks are American Express Company; Bank of America Corporation;The Bank of New York Mellon Corporation; Capital One Financial Corporation; Citigroup; Fifth Third Bancorp; KeyCorp; Morgan Stanley; The PNC Financial Services Group; Regions Financial Corporation; State Street Corporation; SunTrust Banks; U.S. Bancorp; and Wells Fargo.
Last week, the Fed announced the results of its so-called stress tests. The Fed said that 17 of the 18 large banks reviewed had enough capital to withstand a severe recession.
In the announcement today, the Fed revealed the results of its look at the dividend and buyback plans for each of the 18 banks for the next year. The process, officially known as the Comprehensive Capital Analysis and Review or CCAR, is now in its third year.
"Strong capital levels help ensure that banking organizations have the ability to lend to households and businesses and to continue to meet their financial obligations, even in times of economic difficulty," the Fed said in a press release.
The Fed evaluates each of the banks' plans and their planning process. Its determination of whether or not to approve a capital plan depends, in part, on whether the bank would have sufficient capital after a proposed dividend or buyback to meet its financial obligations in a severe economic downturn. It also looks at the process the banks use to arrive at their proposals and how the banks would measure up under the new international bank capital requirements known as Basel 3.
The Fed did not object to the capital plans of Goldman and JPMorgan outright. But it did require each of them to submit new capital plans by the end of the third quarter of this year to "address weaknesses in their capital planning processes." This finding of weakness was not something that was widely anticipated for either Goldman or JPMorgan. A failure to remedy the process would be grounds for rejection of the plans.
In the meantime, each of these banks may begin returning profits to shareholders in the form of dividends or buybacks. Goldman and JPMorgan learned of the specifics of the Fed's concerns with their planning processes earlier Thursday.
The objection to Ally Financial's plan was widely anticipated as it was the only bank to outright fail last week's stress test. The Fed said Ally's capital plan received an objection both on the grounds that its capital ratios would not meet Fed requirements and that its process for capital planning was inadequate. Ally submitted a revised plan but had this also subjected.
The rejection of BB&T's plan is likely to catch many market-watchers off-guard. It was widely expected to ask and receive approval to maintain its current capital plan. The Fed said BB&T's capital plan was objected to based on a qualitative assessment conducted by the Federal Reserve, meaning its capital position would not be strong enough in a stressed economic situation.
Two years ago, Bank of America had its plan to increase dividends rejected, an embarrassment after its CEO had promised a dividend hike. Last year it was Citigroup's turn to be surprised, after the Fed said it could not increase its dividend.
These reviews were begun in the wake of the financial crisis. The 18 banks subject to the tests paid out 19 percent of their profits in common dividends in 2012, half of what they paid out before the financial crisis in 2006.
"The financial crisis showed not only that regulators needed to increase capital requirements and conduct regular stress tests, but also that firms need strong internal processes to evaluate their own capital needs based on their individual risks and circumstances," Federal Reserve Governor Daniel Tarullo said in a statement.
The Fed's announcement did not reveal the particular plans of each bank to make dividends or buy back shares. Individual banks are expected to make announcements detailing plans following the Fed announcement.
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