Big banks pass Fed stress tests

All of the nation’s largest banks passed the latest stress test Wednesday, the first time all aced the exam since the Federal Reserve began administering the exercise seven years ago.

The passing grades show that the nation’s banking system has sufficiently rebuilt its capital levels since the crippling losses of the 2008 financial crisis, while also learning how to effectively plan for another financial catastrophe.

The test also paves the way for the banks to pay the largest dividends in almost a decade, a boon for shareholders who have suffered years of sagging returns.

The banks have the option of returning up to 100 percent of their profits to shareholders, up from 65 percent last year.

Such lavish payouts are exactly what investors had been hoping banks would deliver under a Donald Trump presidency. While the administration has no direct role in the stress test, this year is the first that a Republican Fed governor, Jerome H. Powell, has overseen the process.

Powell, a former private equity executive, has said that he wants to phase out the qualitative aspect of the test for certain banks. The industry has complained that this process is overly subjective.

This year, only 13 of the 34 banks that participated in the stress test had to undergo the qualitative exam.

Previously, banks that had been through some type of scandal leading up to the test often seemed to fail — like Citigroup, which failed the test in 2014 after costly problems in its Mexican unit.

One theory was that the Fed wanted to fail at least one bank every year to keep the industry on its toes.

But this year, the Fed set no such example. Even Wells Fargo, which has been embroiled in a huge scandal over the creation of as many as 2 million unauthorized bank and credit card accounts, passed the stress test Wednesday without any objections from the Fed.

European banks also received good news. Santander Holdings USA, the American unit of the giant Spanish bank, also passed after flunking three years in a row. Deutsche Bank, which has also had trouble on previous stress tests, passed as well.

The one wrinkle this year: The Fed is requiring Capital One to resubmit its new capital plan that addresses “weaknesses in its capital planning process.” Capital One can still pay dividends and repurchase shares.

The banks wasted no time in rewarding their shareholders.

Bank of America, for example, said it planned to increase its quarterly common stock dividend by 60 percent, to 12 cents a share starting in a few weeks — a huge increase for a bank whose dividend used to equal one penny in the years after the crisis.

The nation’s 34 largest banks have $1.2 trillion worth of capital cushion — as measured by their common equity capital — an increase of $750 billion since 2009.

Some of this year’s success may also have to do with practice. The banks have also essentially been working for years on how to pass — planning their capital in anticipation of the Fed’s exam, which tests their ability to weather a major financial shock by running their balance sheets through a series of scenarios.

“After seven years, at some point, you have to get it right,” said David Wright, a managing director in the bank regulatory practice of Deloitte Advisory. “This is quite a victory for the Fed to get everyone close to a perfect score.”

This year’s results come during a broad effort in Washington to roll back financial regulation. Banks have argued that micromanaging by regulators, including the Fed, has limited their ability to lend.

The Treasury Department and Congress have also proposed loosening some stress test rules, including limiting the number of banks that must undergo the tests and giving it every two years instead of annually.

“I view this somewhat as a political decision,” Nejat Seyhun, a finance professor at University of Michigan’s Ross School of Business, said of the test results. “President Trump wants to reduce the influence of the Federal Reserve.”

The stress tests do not include another important segment of lenders — so-called nonbank financial institutions that have taken on a greater role in the mortgage market in the aftermath of the financial crisis.