The Federal Reserve on Thursday cleared the 18 biggest U.S. banks to pay out billions of dollars of capital to shareholders as dividends and stock buybacks, after declaring that they could survive a severe recession with financial strength to spare.
Big firms like JPMorgan Chase (JPM - Get Report) , Citigroup (C - Get Report) , Bank of America (BAC - Get Report) and Goldman Sachs (GS - Get Report) passed the Fed's annual stress tests, as did U.S. subsidiaries of foreign banks like Barclays (BCS) and Deutsche Bank (DB - Get Report) , a statement from the central bank said.
"The stress tests have confirmed that the largest banks are both well capitalized and place a high priority on strong capital planning practices," the Fed's vice chairman for supervision, Randal Quarles, said in the statement.
The annual tests, mandated as part of the 2010 Dodd-Frank Act, are used by regulators to gauge the financial strength of giant U.S. banks whose collapse could put the global financial system and markets at risk.
According to the Fed, the banks were evaluated on their ability to withstand a severe global recession, in which U.S. unemployment rises to 10%, from just under 4% now, with elevated defaults on corporate loans and stress in commercial real-estate markets.
Under that scenario, the 18 banks would incur some $410 billion of losses, but they would still have enough capital to satisfy minimum requirements, according to a separate statement last week.
Many banks paid out big dividends in the years before the 2008 financial crisis, leaving them with insufficient capital to withstand the crisis.
The biggest U.S. banks survived by getting bailouts from the U.S. Treasury Department and taking more than $1 trillion in secret emergency loans from the Federal Reserve.
In a series of press releases after the Fed published its statement, the biggest U.S. banks disclosed their plans for dividends and stock buybacks from the third quarter of 2019 through the second quarter of 2020.
JPMorgan, the largest U.S. bank, said it will increase its quarterly dividend to 90 cents a share from 80 cents, while buying back some $29.4 billion of its own shares.
Bank of America plans to return $37 billion of capital to shareholders, with an 18% dividend increase to 18 cents a share and $30.9 billion of planned stock buybacks.
Citigroup disclosed it would return a total of $21.5 billion to shareholders, including $17.1 billion of share buybacks and a dividend increase to 51 cents a share from 45 cents.
Goldman Sachs said it would buy back $7 billion of its own shares and increase the quarterly dividend to $1.25 a share from 85 cents.
Even Wells Fargo, which is currently operating under tough sanctions from the Fed for allegedly abusive sales practices, passed the test. The bank disclosed its intention to buy back $23.1 billion of stock and increase the quarterly dividend to 51 cents a share from 45 cents.