Federal Reserve gives largest US banks the green light to splash the cash in the second round of stress tests

Lucy White
Citigroup Announces 53,000 New Job Cuts
Citigroup doubled its quarterly dividend after receiving the Fed's blessing (Source: Getty)

Major US banks have performed well in the second round of annual stress tests, as the Federal Reserve (Fed) tonight approved plans for the country’s largest institutions to distribute cash to shareholders.

The stress tests, brought in after the financial crash, are designed to ensure that banks could cope in a crisis.

The Fed's approval of plans from household names such as JP Morgan and Bank of America to use extra capital for stock buyback, dividends and other purposes indicates that the banks have built up adequate capital buffers and improved risk management procedures.

Citigroup doubled its quarterly dividend, while both Citigroup and JP Morgan announced their biggest ever share buybacks.

There was a slight sticking point for one bank, Capital One Financial. The Fed said it must resubmit its scheme by the end of the year, although it was allowed to go on with its capital plan in the meantime.

A senior Fed official said that altogether, banks would be able to pay out 100 per cent of their projected net income over the next four quarters.

This compares to 65 per cent after last year’s results, and would be the first time since 2008 that that banks return at least as much money to shareholders as they produce in annual profit.

This is the second round of the annual multi-stage stress test. Last week, all of the banks passed the first “quantitative” stage of the test which judged that they would have enough capital to meet regulatory requirements in a severe economic crisis.

Citigroup performed the best, with a tier one capital ratio of 9.7 per cent. Ally Financial and KeyCorp were both below seven per cent.

Only the 13 largest of the 34 banks were subject to the stage two tests.

These are the first tests under President Donald Trump, who stated dergulation of the banking system as one of his aims while campaigning.

It is possible that the positive results could be used by Trump to justify a lighter regulatory touch.

Read more: US banks pass the first round of the Federal Reserve's annual stress tests

Related articles