WASHINGTON -- All but four of 19 major U.S. banks got a green light Tuesday to boost dividends and buy back shares after the Federal Reserve declared them strong enough to survive another serious recession.
JPMorgan Chase, Wells Fargo, and other large bank holding companies that passed the Fed's so-called stress tests announced they would return capital to shareholders, igniting a late-day rally on Wall Street. The Dow Jones industrial average closed at its highest level 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 nonpartisan 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 crisis that sends unemployment to 13 percent, causes stock prices to be cut in half, and lowers home prices 21 percent from today's levels.
The Fed can stop banks that failed from paying stock dividends or buying back their own stock. The Fed also can force them to raise money by selling additional stock or issuing debt.
After last year's stress tests, the Fed allowed some banks -- including JPMorgan and Wells Fargo -- to raise their dividends because they were deemed healthier.
The Fed has conducted the stress tests each year since 2009. The Fed did not publicize the results of its tests in 2010 or 2011.
The Fed released the results two days earlier than planned after JPMorgan sent out a statement Tuesday saying it had passed the test.
After the first round of tests, in 2009, the Fed ordered 10 banks to raise a total of $75 billion. Bank of America was told to raise $34 billion.
This year's test was more rigorous, the Fed said, so it could be assured the industry was prepared to meet more stringent international banking rules that go into effect in 2013.
The Fed said it also looked more closely at hypothetical loan losses from credit cards and mortgages.
The Fed wants banks to show they not only could withstand the crisis but also could keep lending to individuals and businesses. Restricting lending during a crisis, as the banks did in 2008, makes the economic toll worse.
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