UPDATE 3-Fed tells JPMorgan, Goldman to improve capital plans

Thu Mar 14, 2013 10:50pm EDT

* Lets JPMorgan, Goldman proceed with plans
    * Fed rejects capital plans by BB&T and Ally
    * Other major banks can proceed with dividends, buybacks
    * Shares of JPMorgan, Goldman and BB&T fall after hours


    By Emily Stephenson and Rick Rothacker
    March 14 (Reuters) - In a blow to two major Wall Street
banks, the Federal Reserve told Goldman Sachs Group Inc 
and JPMorgan Chase & Co 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 their capital plans or capital planning processes 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
    Overall, the Fed said the stress tests showed that the 18
banks have substantially increased their capital bases since the
regulator's first exams in 2009. From the end of 2008 through
the end of 2012, their total Tier 1 common equity increased to
$792 billion from $393 billion.
    Part of the reason for their strengthened position is that
banks are distributing much less capital to shareholders, the
Fed said. The 18 institutions doled out 19 percent of their net
income in common dividends in 2012, half of what they paid as a
percentage of profits in 2006, before the onset of the financial
crisis.
    The Fed on Thursday did not provide a breakdown of each
bank's plans for dividends and repurchases, but some individual
banks 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.
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