Wall Street’s largest lenders boosted their dividends after passing this year’s US Federal Reserve stress tests, a hurdle that regulators made easier to clear by softening some of the requirements laid out in previous years.
JPMorgan Chase & Co., Goldman Sachs Group and Bank of America were among firms that raised quarterly payouts after the Fed’s annual review last week showed that all 22 banks examined would maintain enough capital to withstand a hypothetical economic downturn.
Citigroup, Wells Fargo and Morgan Stanley, as well as several other large lenders, also boosted their dividends. In addition, JPMorgan’s board authorised a US$50 billion share buyback, and Morgan Stanley reauthorised a multi-year share repurchase program of up to US$20 billion, with no expiration date.
The Fed’s exam — a product of the 2008 financial crisis — tends to set the tone for how aggressive banks are in returning capital to shareholders through dividends and buybacks. It requires banks to consider hypothetical crisis scenarios and estimate the losses they might face based on their books of business.
Last week, all 22 banks comfortably passed after determining they would withstand more than US$550 billion in losses. The results showed that “large banks are well positioned to weather a severe recession”, the Fed said.
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The scenario in this year’s tests led to lower loan losses in a less severe scenario, due to the mild slowing of the US economy in 2024, among other factors. The results were also affected by lower private equity losses and higher net revenue.
The Fed announced last year that it planned to make changes to its process, and in April unveiled a proposal to average results over two years when setting capital requirements.
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Fed Vice Chair for Supervision Michelle Bowman has said that potential changes would help the agency address the “excessive volatility in the stress test results and corresponding capital requirements”.
In that same vein, the Fed also unveiled plans to decrease what’s called the enhanced supplementary leverage ratio, which requires banks to hold a certain amount of capital relative to their assets.
Charts: Bloomberg
