Bank of America and Wells Fargo said Thursday they plan to increase their dividends and buy back more shares after passing the second and final round of the Federal Reserve's annual "stress tests" of the largest financial firms.
The widely watched tests are a key tool in the Fed's oversight of large banks to avoid a repeat of the financial crisis. The aim is to ensure banks have enough capital to absorb losses and keep lending even in a serious recession.
If banks' capital levels fall too far in the tests, which subject them to hypothetical economic downturns, the Fed can block their plans to increase dividends or buy back more shares.
Bank of America said it plans to increase its quarterly common stock dividend from 12 cents a share to 15 cents beginning in the third quarter of this year. The Charlotte-based bank also said it plans to repurchase approximately $20.6 billion in common stock from July 1 through June 30, 2019.
In a share repurchase, the bank doesn't buy back shares directly from individual shareholders. Instead, it purchases them from institutional and other large investors through stock exchanges.
San Francisco's Wells Fargo said it plans to raise its dividend from 39 cents to 43 cents starting in the third quarter. It also plans to buy back up to $24.5 billion in shares from the third quarter through the second quarter of 2019.
Charlotte's third-largest bank by deposits, Winston-Salem-based BB&T, said it plans to increase its dividend from 37.5 cents to 40.5 cents and buy back up to $1.7 billion in shares beginning in the third quarter through the second quarter of 2019.
Thursday's tests involved 35 large banks that hold about 80 percent of the total assets of all U.S. financial companies.
The findings show that the largest banks have strong capital levels, Fed Vice Chairman Randal Quarles said in a statement. Even after making their capital distributions, the firms would still be able to lend in a severe recession, he said.
The firms have also substantially increased their capital since the first stress tests led by the central bank in 2009, the Fed said.
Last week, in round one of the tests, the Fed revealed how low banks' capital levels might fall in hypothetical downturn scenarios, including a severe global recession in which U.S. unemployment rises to 10 percent by the third quarter of 2019.
There was no pass or fail in the first round, and banks didn't face consequences from the Fed no matter how far their capital levels dropped. In round one, the Fed said a key measure of capital cushions at banks fared well under stress.
In the second round, the Fed measures how capital levels perform when factoring in the banks' proposed capital plans.
If capital drops below Fed minimums, the regulator can reject the proposals. The regulator can also reject the plans based on "qualitative" problems, such as weaknesses in determining the appropriate amount of capital for their risks.
Most banks passed Thursday, but the Fed dinged four.
It failed the U.S. unit of Deutsche Bank and objected to its capital plan. The other three — Goldman Sachs, Morgan Stanley and State Street Corp. — did not fail. But the Fed issued conditional approvals over concerns at those firms.