THE FEDERAL Reserve paved the way for a multi-billion dollar dividend bonanza last night by passing 15 banks in its latest stress tests, allowing them to return cash to shareholders.
The US central bank said most of the largest American institutions – with the exception of Citigroup and three others – had sufficient capital buffers even if a fresh global crisis triggered a spike in unemployment and a collapse in the housing market.
Bank of New York Mellon came out top on the Fed’s wargaming, with a core Tier 1 capital ratio of 13.1 per cent, followed by State Street and American Express on 12.5 per cent and 10.8 per cent respectively.
JP Morgan Chase announced one of the largest payouts, raising its quarterly dividend by five cents to 30 cents and pledging to buy back up to $15bn of its shares.
American Express said it will buy back up to $5bn of its own shares and increase its dividend while Bank of America passed the tests but has not asked permission to make a payout.
The failure of Citi, however, shocked analysts and sent its shares tumbling nearly five per cent after-hours.
The market had been expecting the US’s third-largest bank to raise its dividend for the first time since the financial crisis but the Fed said Citi, Ally Financial and SunTrust came out worst in its scenario with Tier 1 capital ratios of 4.9 per cent, 4.4 per cent and 4.8 per cent respectively.
The regulator also failed MetLife, the largest life insurer in the US, on the basis of its risk-based capital ratio. It was lower than any of the other banks examined.
The Fed based its forecasts on a new global slump including a rise in US unemployment to 13 per cent, a drop in house prices of 21 per cent, a halving in equity markets and another downturn in Europe.
Overall it estimated the 19 bank holding companies’ worst-case losses at $534bn over the 27 months to the end of 2013. Every institution tested, however, is in a stronger position than after the 2008 crisis, it said.
The Fed rushed out the results two days early after JP Morgan broke ranks and said the Fed had approved its plans for a dividend increase.
JP Morgan’s statement provided a late spark for the US market, which posted its best day this year. The Dow Jones industrial average jumped 217.97 points, or 1.68 per cent, to close at 13,177.68.