Goldman Sachs Group Inc. and JPMorgan Chase & Co., the world’s biggest trading firms, must submit new capital plans to regulators to address weaknesses in their planning processes found by the Federal Reserve.
The central bank didn’t object to the two New York based firms’ capital plans, and approved 14 other banks’ proposals, the Fed said Thursday in a statement. Capital plans submitted by Ally Financial Inc. and BB&T Corp. were rejected, while American Express Co. had to revise its submission to win approval.
The problems found at Goldman Sachs and JPMorgan related to projections of losses and revenue, according to a Fed official. The banks can immediately implement dividend and buyback plans, though theymust fix the weaknesses identified and resubmit by the end of the third quarter, the official said. Regulators, intent on preventing a repeat of the 2008 financial crisis, have run annual stress tests to see how the largest lenders would fare in a recession or economic shock to ensure that firms don’t jeopardize their capital strength.
Goldman Sachs and JPMorgan “exhibited weaknesses” in their capital planning that were “significant enough to require immediate attention, even though those weaknesses do not undermine the quantitative results of the stress tests for that firm or the overall reliability of the firm’s capital planning process,” the Fed said in a report on the stress-test results.
Goldman Sachs would probably be left with a Tier 1 common equity ratio of 5.26 percent in a sharp economic downturn, the Fed said today. JPMorgan’s ratio was 5.56 percent. Those were the two lowest scores among banks whose capital plans were approved. Goldman Sachs and JPMorgan also had the highest trading losses under the Fed’s scenario.
Goldman Sachs last year raised its dividend twice and repurchased $4.64 billion of stock after winning Fed approval. JPMorgan increased its quarterly dividend to 30 cents a share from 25 cents after last year’s stress test and authorized a $15 billion stockrepurchase program. That buyback program was scaled back after the firm disclosed a credit-derivatives trading loss that ballooned to more than $6.2 billion.
JPMorgan Chief Executive Officer Jamie Dimon and Chief Financial Officer Marianne Lake signaled earlier this year that the bank would request a higher dividend and lower buyback amount.
“The Fed is still being cautious in not giving banks free rein in terms of capital return,” Joseph Morford, an RBC Capital Markets Corp. analyst, said in a phone interview before the results were announced. “The expectation is no one will be allowed to return more than 100 percent of the earnings they generate, so the industry is still retaining capital.”
Goldman Sachs, the world’s biggest securities firm before converting to a bank in 2008, generates most of its revenue from securities trading and investing its own money. The company still marks the value of most of its holdings to market prices every day, which can lead to more volatile fluctuations than at banks that recognize changes more gradually.
Analysts have said they expect banks to increase payouts to the highest level since 2007 after lenders cut dividends to token amounts during the financial crisis and built up capital ratios in the following years.
The Fed last week disclosed how banks performed in a hypothetical recession in which U.S. unemployment peaks at 12.1 percent, home prices fall 21 percent and stocks plunge 52 percent.
Thursday’s test, known as the Comprehensive Capital Analysis & Review, required the 18 firms to submit plans for managing their capital, which could include buying back shares and increasing dividends. The central bank then gauged how strong each bank would be with the funds that remained.
For the first time, banks were allowed to revise those plans and immediately resubmit a new proposal for approval. The option came after Citigroup and SunTrust Banks Inc. had their capital plans rejected last year while staying above the 5 percent minimum without those plans.
The Tier 1 common ratio measures a bank’s core equity, made up of common shares and retained earnings, divided by its total assets adjusted for risk using global banking guidelines.
Projected losses for the 18 banks under a scenario of deep recession and peak unemployment of 12.1 percent would total $462 billion over nine quarters, the Fed said last week. The aggregate Tier 1 common capital ratio would fall from an actual 11.1 percent in the third quarter of 2012 to 6.6 percent in the fourth quarter of 2014 including the banks’ original capital- plan submissions. The firms represent more than 70 percent of the assets in the U.S. banking system.
In the scenario, the 18 lenders would lose $316.6 billion on souring debts, led by Bank of America Corp. The Charlotte, N.C.-based firm would lose $57.5 billion, followed by Citigroup, with $54.6 billion. JPMorgan and San Francisco-based Wells Fargo & Co. would lose almost $54 billion apiece.
U.S. banks have grown stronger since the crisis. The Fed said in November the largest banking groups had almost doubled their Tier 1 common capital to $803 billion in the second quarter of last year from $420 billion in the first quarter of 2009. Dimon said last month that banks are accumulating more capital than they need.
Some large lenders haven’t reached capital-ratio requirements under new rules set by the Basel Committee on Banking Supervision, which may have caused them to be cautious in their requests, said Richard Staite, a Londonbased analyst at Atlantic Equities LLP.
Business, Pages 25 on 03/15/2013