Banks Ace Fed Stress Tests, Pave Way for Shareholder Payouts

Wall Street’s biggest banks are set to return tens of billions of dollars to investors after all the lenders passed the Federal Reserve’s annual test of their ability to withstand market turmoil.

The banks examined showed that they had enough capital to handle a cocktail of surging unemployment, collapsing real-estate prices and a plunge in stocks, the Fed said in a statement Thursday. Major firms including JPMorgan Chase & Co., Morgan Stanley and Goldman Sachs Group Inc. also faced a made-up market shock that tested the resiliency of their trading operations.

While the terms of the tests were announced in February before US inflation had surged to a 40-year high, the scenarios no longer seem as far-fetched amid mounting concerns of a global economic slowdown. The passing marks effectively give banking giants a green light to return billions of dollars to investors in dividends and share buybacks.

“Banks continue to have strong capital levels, allowing them to continue lending to households and businesses during a severe recession,” the Fed said in the statement.

The Fed said the more than 30 lenders it examined were able to remain above their minimum capital requirements during the hypothetical economic meltdown, which would have caused them total projected losses of $612 billion.

Lenders use the tests to assess how much capital they can afford to dole out to investors without falling below the amount they are required to hold as a cushion. If a firm breaches its so-called stress capital buffer at any point in the year following the exams, the Fed can apply sanctions, including restrictions on capital distributions and bonus payments.

With their results in hand, banks can announce their payout plans starting Monday. Estimates by Barclays Plc analysts indicate that JPMorgan is set to lead the way with $18.9 billion in combined dividends and share buybacks, followed by Bank of America Corp. and Wells Fargo & Co. with $15.5 billion and $15.3 billion, respectively. In all, US banking giants are set to return $80 billion to shareholders this year, according to data compiled by Bloomberg based on the projections.