Most of the largest US banks passed their annual stress test, according to the Federal Reserve, in a conservative report card that underscored the recovery of the financial sector but called out a few laggards, namely Citigroup.
The Fed announced the results in an earlier-than-expected release last night.
JPMorgan Chase pulled the trigger on announcing its own glowing marks before the Fed's release, and helped lift the US stock market.
But the failing grade for Citigroup, the nation's third-largest bank, was a shock. Going into the tests some analysts felt it had a better chance of a positive surprise than any other financial institution.
The Fed said that 15 of the 19 banks tested would have enough capital, even if they suffered a financial shock that would see unemployment hit 13% and housing prices drop 21%.
The results paved the way for many of the passing banks to announce highly anticipated plans to boost dividends and buy back stock. The outcome showed a middle-of-the-road approach.
The Fed failed enough banks to give the tests credibility and to elicit industry outcries about the tests being too tough, but it reassured markets that the US bank industry is generally healthy.
MetLife, the largest life insurer in the US, was also among the four financial institutions that failed the exam, which applied worst-case stress scenarios looking out through the end of 2013. Ally Financial and SunTrust were also at the bottom of the heap.
Among the winners was JPMorgan, which has been agitating for regulators to loosen the handcuffs on the ability of banks to raise dividends and buy back stock.
The Fed uses the annual stress tests to give the markets a window into the health of the US bank industry, and also determine if individual banks are strong enough to reduce their capital buffers.
Bank of America, the nation's second-largest bank, passed the Fed's test, but it did not ask for a dividend increase or to buy back shares. Last year, the Fed rejected the bank's request for a dividend hike, in a major embarrassment for CEO Brian Moynihan.
JPMorgan, in a surprise to markets, announced that the Fed had given it permission to raise its dividend by 20% and spend as much as $12 billion buying back stock this year.
The Fed had been scheduled to release the test results after markets closed on Thursday. A person close to the situation, who was not authorised to speak on the record, said the Fed quietly shifted the release to yesterday evening after leaks about the tests came out Monday evening. A senior Federal Reserve official told reporters that the timing of JPMorgan's announcement was the result of less-than-perfect communication, and that nobody at JPMorgan was at fault.
Regarding the outcome of the tests, the Fed official said the capital positions of US banks has improved substantially in the last three years. US regulators first ran a stress test in 2009 in a bid to show markets during the financial crisis that banks' balance sheets were better than some thought.
The Fed took a tough line with the banks this year, and in a number of instances, the central bank's estimates of banks' losses under the hypothetical financial shock were larger than the firms' own, the Fed official said.
Citigroup did not dispute the Fed's decision and said it would submit a revised capital proposal later this year. Some analysts had expected Citigroup to win permission to raise its dividend to as much as 10 cents from a penny a share. In one sign of its weakness, Citigroup had the second-highest total loan loss rate under the stress scenario, behind Capital One, the Fed said.
The Fed released 82 pages of detailed information showing how the 19 banks fared under the hypothetical stress scenario. The regulator left it to the banks themselves to reveal if they had received permission to boost dividends or buy back stock.
The bank holding companies whose balance sheets weathered the hypothetical storm best were Bank of New York Mellon, State Street and American Express.
Wells Fargo, US Bancorp, BB&T, American Express, KeyCorp, PNC, Morgan Stanley , Goldman Sachs, Bank of New York Mellon said they had received permission to boost dividends or repurchase shares.
