The nation's largest banks are rewarding shareholders by spending tens of billions raising their dividends and buying back stock after getting the green light from the Federal Reserve.
The Fed on Thursday said it had approved the capital plans the nation's 18 largest banks submitted as part of this year's stress tests. That means it determined the banks could raise their dividends and buy back more shares this year and still have enough capital to survive a hypothetical deep recession in the next year.
Immediately after the Fed's announcement, the major banks started unveiling their plans.
JPMorgan, the nation's largest bank by assets, said it plans to buy back $29.4 billion in shares this cycle. It would also increase its dividend 12.5% to 90 cents a share. In total, JPMorgan would return roughly $40 billion to shareholders through dividends and stock repurchases over the next year.
Wells Fargo announced plans to buy back $23.1 billion in stock the next year and increase its dividend 13.3% to 51 cents a share. The bank remains under investigation by state and federal authorities for abusive banking practices.
Citigroup said it would buy back $17.1 billion in stock next year and also plans to increase its dividend to 13.3% to 51 cents a share.
In total, the Fed expects the nation's 18 biggest banks to return more than 100% of their expected earnings to shareholders this annual cycle. In another way of putting it, these banks collectively are expected to spend more in dividends and stock repurchases than they expect to make in profit this year.
The central bank's stress tests were mandated after the Great Recession under the Dodd Frank Act. They are designed to test whether a large bank could survive a sudden economic downturn without imploding, as was the case a decade ago.
JPMorgan and Capital One were given approvals on their capital plans only after both pared back their plans. The original drafts of JPMorgan and Capital One's plans exposed them to being too undercapitalized in a worse-case scenario. The Fed also asked one European bank, Credit Suisse, to fix a few issues in its capital plan and will revisit the bank's plan in four months.
Deutsche Bank, which last year did not pass the Fed's muster, was able to pass with no issues this year.
The Fed adjusts its stress tests each year, depending on the economic climate. In this year's most dire scenario, known as the severely adverse scenario, the Federal Reserve tested for a hypothetical deep global recession, with the U.S. unemployment rate jumping to 10% from its current level of 4% and the stock market falling 50% from its peak.
The Fed also tested how well the nation's largest banks would handle a sharp drop in commercial real estate prices, as well as heightened stress in the corporate debt markets. Several economists and bank executives have cited the substantial increase in loans made to distressed companies, known as leveraged lending, as an area of concern for the financial system.
All 18 banks passed the first part of the Fed's tests last week. This week's tests are considered harder and more important because they include the banks' plans to give back capital to shareholders while still maintaining adequate levels to survive an economic catastrophe.
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