Two of the world's biggest trading firms — Goldman Sachs Group Inc. and JPMorgan Chase & Co. — must submit new capital plans to regulators to address weaknesses in their planning processes found by the Federal Reserve.
The Fed approved 14 other banks' proposals, the agency said in a statement. Capital plans submitted by Ally Financial Inc. and BB&T Corp. were rejected.
The problems found at Goldman Sachs and JPMorgan related to projections of losses and revenue, according to a Fed official. The banks can immediately implement dividend and buyback plans, though they must fix the weaknesses identified and resubmit the capital plans by the end of the third quarter, the official said. Regulators, intent on preventing a repeat of the 2008 financial crisis, have run annual stress tests to see how the largest lenders would fare in a recession or economic shock to ensure that firms don't jeopardize their capital strength.
Goldman Sachs and JPMorgan "exhibited weaknesses" in their capital planning that were "significant enough to require immediate attention, even though those weaknesses do not undermine the quantitative results of the stress tests for that firm or the overall reliability of the firm's capital planning process," the Fed said.
Goldman Sachs would probably be left with a Tier 1 common equity ratio of 5.26% in a sharp economic downturn, the Fed said Thursday. JPMorgan's ratio was 5.56%. Those were the two lowest scores among banks whose capital plans were approved. Goldman Sachs and JPMorgan also had the highest trading losses under the Fed's scenario and overestimated by more than percentage point their Tier 1 common equity ratio under the stress scenario.
Goldman Sachs last year raised its dividend twice and repurchased $4.64 billion of stock after winning Fed approval. JPMorgan boosted its quarterly dividend to 30 cents a share from 25 cents after last year's stress test and authorized a $15-billion stock-repurchase program. That buyback program was scaled back after the firm disclosed a credit-derivatives trading loss that ballooned to more than $6.2 billion.
JPMorgan Chief Executive Jamie Dimon, 57, and Chief Financial Officer Marianne Lake, 43, signaled this year that the bank would request a higher dividend and lower buyback amount.
"The Fed is still being cautious in not giving banks free rein in terms of capital return," Joseph Morford, an RBC Capital Markets Corp. analyst, said in a phone interview before the results were announced. "The expectation is no one will be allowed to return more than 100% of the earnings they generate, so the industry is still retaining capital."