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BB&T Capital Plan Rejected by Fed (Update 3)

Updated from 5 p.m. with capital return announcements from most banks subject to the Federal Reserve's stress tests, now including BB&T and Goldman Sachs, and with commentary from White & Case Partner Ernie Patrikis, a former general counsel and chief operating officer of the Federal Reserve Bank of New York.

NEW YORK (TheStreet) -- The Federal Reserve's 2013 bank stress test process has finally ended, with the regulator after Thursday's market close announcing approval for 15 of 17 large banks capital plans, but "objecting" to the capital plans submitted by BB&T (BBT) of Winston-Salem, N.C., and Ally Financial.

JPMorgan Chase (JPM) and Goldman Sachs (GS) both received "conditional approval" for their capital plans, with the Fed requiring both companies to submit revised capital plans "by the end of the third quarter to address weaknesses in their capital planning processes."

Goldman Sachs CEO Lloyd Blankfein said in a statement that the firm was "pleased to continue to have the flexibility to return capital to shareholders," but the company released no further details on its capital plan.

The Comprehensive Capital Analysis and Review was the second part of the Fed's annual stress test process. The first part of the process ended last Thursday, when the Federal Reserve said 17 of 18 large financial holding companies could weather a nasty recession beginning in 2013 and remain well capitalized through the end of 2014.

Ally Financial was the only bank to fail the first round of stress tests, with the Federal Reserve projecting the company would lose $9.3 billion before taxes from a severe recession through the end of 2014, with a Tier 1 common equity ratio dropping as low as 1.5%, far from the 5.0% required to be considered well capitalized. Ally Financial is the former GMAC, and its ownership structure is 74% controlled by the U.S. Treasury, following several bailout investments for GMAC in 2008 and 2009.

The CCAR completed the stress tests, this time including the banks' submitted capital and applying the same severely adverse scenario, which includes an increase in the U.S. unemployment rate to over 12% in the second half of 2013, with a 50% drop in equity prices and a 20% decline in real estate prices.

Needless to say, Ally Financial didn't request Federal Reserve approval any dividends on common shares, or for share buybacks, but the Fed still wasn't happy.

The regulator said Ally Financial's capital plan was rejected "both on quantitative and qualitative grounds," while BB&T's capital plan was rejected based on "a qualitative assessment conducted by the Federal Reserve."

BB&T submitted financial statements to the Fed prior to the Feb. 6 deadline, but later on March 4 "disclosed publicly that it had reevaluated its process related to calculating risk-weighted assets and determined that certain adjustments, primarily related to the presentation of certain unfunded lending commitments, were required in order to conform to regulatory guidance."

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