NEW YORK – The country's largest banks are rewarding shareholders by spending tens of billions to increase their dividends and buy back shares after they have received the green light from the Federal Reserve.
The Fed announced Thursday that it has approved the US Federal Reserve's capital plans The country's top 18 banks have applied for this year's stress test. This means that banks could increase their dividends and buy back more shares this year, yet have enough capital to weather a hypothetical deep recession next year.
Read: JPMorgan and Capital One have had to lower shareholder distributions to obtain Fed approval.
Immediately after the announcement of the Fed, the big banks began to reveal their plans.
JPM, + 0.33%
the country's largest asset-backed bank, plans to repurchase $ 29.4 billion worth of stock this cycle. It would also increase its dividend by 12.5% to 90 cents per share. In total, JPMorgan would pay back approximately $ 40 billion to shareholders through dividends and share buybacks over the next year.
WFC, + 1.07%
announced plans to repurchase $ 23.1 billion in shares next year and increase the dividend by 13.3% to 51 cents per share. The bank continues to be investigated by state and federal agencies for abusive banking practices.
C, + 1.38%
announced that it will repurchase $ 17.1 billion worth of stock next year and plans to increase its dividend to 13.3% to 51 cents per share to increase.
All in all, the Fed expects the country's top 18 banks to return more than 100% of their expected profits to shareholders this year. In other words, it is expected that these banks will spend more on dividends and share repurchases than they expect to profit this year.
The central bank's stress tests were commissioned after the Great Recession under the Dodd-Frank Act. They are to test whether a large bank can survive a sudden economic downturn without implosion, as it did a decade ago.
JPMorgan and Capital One
received permits for their capital plans only after both had reduced their plans. The original blueprints of JPMorgan's and Capital One's plans have shown that they are undercapitalized at worst. The Fed also consulted a European bank, Credit Suisse
CS, + 2.56%
to fix some problems in its lending plan, and will revise the bank's plan in four months.
DB, + 2.31%
which did not pass the Fed pattern last year, could pass without any problems this year.
The Fed adjusts its stress tests to economic conditions every year. In the worst scenario of the year, known as the most detrimental scenario, the Federal Reserve has reviewed a hypothetical deep global recession, with the US unemployment rate falling from the current 4% to 10% and the stock market down 50% ,
The Fed also tested how well the country's largest banks would cope with a sharp fall in commercial property prices and increased pressure on corporate debt markets. Several bank economists and executives have cited the significant increase in loans to distressed companies known as leveraged lending as a cause for concern for the financial system.
All 18 banks passed the first part of the Fed test last week. This week's tests are considered to be tougher and more important as they include banks' plans to return capital to shareholders while maintaining an adequate level to weather an economic catastrophe.