Fed: 15 banks pass stress test; Citi, 3 more fail

WASHINGTON (AP) — All but four of 19 major U.S. banks got a green light Tuesday from the Federal Reserve to boost their dividends and take other steps that will make their stocks more attractive to investors. The Fed declared them strong enough to survive a downturn worse than the Great Recession.

The Fed’s findings signaled its confidence that the financial system, which nearly collapsed 31⁄2 years ago, is healthy again.

J.P. Morgan, Wells Fargo and other large bank holding companies that passed the Fed’s so-called stress tests raised their dividends and announced plans to buy more of their stock. The news ignited a late-day rally on Wall Street. The Dow Jones industrial average shot up 218 points to its highest close since the end of 2007.

“It’s clearly good news — the U.S. banking system can now withstand a quite severe recession without falling over,” said Douglas Elliott, a fellow at the Brookings Institution, a non-partisan policy think tank.

One notable exception was Citigroup, the nation’s third-largest bank. It was among the companies the Fed said lacked enough capital to withstand another severe economic and financial crisis. Its stock price fell 4 percent in after-hours trading. The Fed announced the results after markets had closed.

The other three financial institutions that did not pass the Fed’s hypothetical stress test were Ally Financial, SunTrust and MetLife.

The Fed reviewed the balance sheets of 19 bank holding companies to determine whether they could withstand a severe crisis: unemployment at 13 percent, stock prices falling 60 percent over two years and home prices plunging 21 percent from today’s levels.

The overall financial system is much stronger than it was in 2009. In the first quarter of that year, the 19 companies stress-tested by the Fed held $420 billion in cash and assets easily convertible to cash. That figure climbed to $759 billion by the end of 2011.

The banks that passed the test Tuesday celebrated with announcements of increased dividends and plans to buy back their own shares:

• JPMorgan Chase is increasing its dividend to 30 cents per share from 25 cents and plans to buy back $15 billion of its stock by the first quarter of 2013. The company’s outstanding stock is currently worth $136.7 billion.

• U.S. Bancorp said it will boost its annual dividend by 56 percent to 78 cents per share and buy back up to 100 million shares of its stock.

• Wells Fargo said it will increase its dividend to 22 cents per share from 12 cents.

For those banks that failed, the Fed can stop them from paying stock dividends or buying back their own stock. The Fed can also force them to raise money by selling additional stock or issuing debt.

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