The Federal Reserve told Goldman Sachs (GS.N) and JPMorgan Chase (JPM.N) that they must fix flaws in how they determine capital payouts to shareholders, but still approved their plans for share buybacks and dividends.
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 (BBT.N) and Ally Financial.
The results show how the Fed is keeping a tight leash on the nation's big banks five years after the U.S. financial crisis.
The annual stress testing process 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 that 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 dividends to shareholders or buy back shares.
American Express (AXP.N) had to submit an adjusted capital plan after the Fed determined its first proposal would have eroded its capital position too much.
Regulators gave Goldman Sachs and JPMorgan conditional approval based on "qualitative" concerns with their capital planning processes.
The Fed said JPMorgan and Goldman Sachs each had "weaknesses in its capital plan or capital planning process that were significant enough to require immediate attention, even though those weaknesses do not undermine the quantitative results of the stress tests."
A senior Fed official declined to identify the specific problems but said that capital planning involves projecting revenues and losses under stress scenarios.
The two banks 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 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.
The Fed did not provide a breakdown of each bank's plans for dividends and repurchases. Some individual banks on Thursday 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.
Bank of America (BA.N) 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.
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 said it lowered 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.
This year was the first time the Fed gave banks a second shot at capital distributions, giving them 48 hours after the initial results were announced last week to submit a new plan.
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 (GM.N) 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.
Ally did not immediately respond to a request for comment. A senior Fed official would not disclose Ally's capital plan.
The Fed said on Thursday that it had confirmed an error in Goldman's initial data submission. The Fed released a corrected version of the stress-test results, which showed lower projected capital ratios for Goldman.
A senior Fed official said the problem stemmed from a projection of when some capital instruments would mature and was discovered in consultation with Goldman Sachs.
(Reporting by Emily Stephenson and Rick Rothacker, with additional reporting by Lauren Tara LaCapra and David Henry; Editing by Karey Van Hall and Tim Dobbyn)