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Federal Reserve stress tests find top banks are strong, setting stage for wave of payouts
[NEW YORK] The Federal Reserve said Thursday that its annual tests of the financial strength of the 18 largest banks in the United States revealed that each had enough capital to justify paying some of it out to shareholders.
The clean bill of health is good news for big banks and their shareholders, but it could fuel concerns that federal regulators are embracing a laissez-faire approach to financial oversight.
There was one caveat to the Fed's across-the-board thumbs-up: The central bank said it found weaknesses in how Credit Suisse was measuring potential losses, and the Fed therefore capped the amount of money the Swiss bank could return to its investors until it corrected the problem.
The Fed's "stress tests" examine how the largest banks would fare in a severe economic downturn or a sudden shock to the global financial markets. After a two-part evaluation, banks either receive permission to return capital — via repurchasing their own shares, paying dividends or other means — or are prohibited from doing so until they fortify their capital cushions or strengthen their management.
The Fed is required by the Dodd-Frank financial-regulation law to perform regular health checks on banks. The goal is to make sure they have enough capital to withstand a repeat of the 2008 financial crisis and wouldn't require taxpayer bailouts.
Investors are likely to cheer the results, because banks will now be able to give shareholders a cut of the record profits they have been earning. Those profits are due in part to the strong US economy and also to the Trump administration's 2017 tax cuts.
Last year, Goldman Sachs and Morgan Stanley had to cap the sums they gave back to investors after the Fed said they needed more capital. Deutsche Bank was the only company to fail last year's test outright.
This year, a couple of banks squeaked by.
JPMorgan Chase had to submit adjustments to its capital payouts after the Fed found that in a severe crisis it would not have met minimum capital requirements.
Deutsche Bank passed this year. The Fed said the bank still had more changes to make to its capital operations, but that it had passed the test because it had made significant progress on fixing its problems.