Results of the third round of stress tests for the largest U.S. banks shows the industry headed in a healthier direction compared to 2009.
The first round of tests, administered during the height of the financial crisis, ended with a mandate for the largest lenders in the country to raise $75 billion in new capital. This time around, in results released Wednesday, no new capital was mandated and 15 of the 19 banks were given the green light to continue with their dividend plans or share buyback strategies. All but one of the banks were judged to be in good enough shape to withstand a severe downturn in the economy, one in which stock prices would fall sharply and unemployment would rise from 8.3 percent to 13 percent.
Citigroup Inc. passed the test, but not exactly with flying colors. The bank was told not to proceed with its dividend and stock buyback plans, as that would put its capital reserves in a precarious spot. Citigroup shares fell Tuesday in response to the relatively poor showing.
"In light of the Federal Reserve's actions, Citi will submit a revised Capital Plan to the Federal Reserve later this year," the bank said in a statement.
It is all about confidence. If investors smell fear, they will react. That explains Citigroup's face-saving defiance. It also explains why Bank of America did not submit a plan for dividend increases or buybacks. Their plan was rejected in the second round of stress tests. Embarrassment is not something that plays well in a quarterly statement.
Citigroup, Ally Financial Inc., MetLife Inc. and SunTrust Banks Inc. were all told their capital plans were too risky. They could survive an economic downturn, all things remaining equal, but they are not strong enough to increase rewards to shareholders just yet.
Shareholders of the other banks were looking at an aggregate pool of $32 billion in increased dividends and share value increases, The Wall Street Journal reported.
That does play well on Wall Street and shares of JPMorgan & Chase climbed 7 percent after it announced a $15 billion stock repurchase plan.
Even though share values at Citigroup and SunTrust fell, the financial firms KBW index rose 4.6 percent, the Journal said.
Begrudgingly or not, it is frequently noted that the $900 billion bank bailout program known as the Troubled Asset Relief Program worked, despite the fact that it was little used for its intended purpose of buying toxic securities from banks.
The TARP program did not increase lending and a mandate to do so would have been a risky play. But it did buy time. That's a fair purchase. That has value; Time is not cheap. It wasn't even a fun time. But, to borrow from a credit card slogan: When it comes to priceless, time is right up there.
In international markets Wednesday, the Nikkei 225 index in Japan gained 1.53 percent, while the Shanghai composite index in China lost 2.63 percent. The Hang Seng index in Hong Kong shed 0.15 percent, while the Sensex in India added 0.59 percent.
The S&P/ASX 200 in Australia rose 0.93 percent.
In midday trading in Europe, the FTSE 100 index in Britain gained 0.39 percent, while the DAX 30 in Germany rose 1.3 percent. The CAC 40 in France climbed 0.8 percent, while the Stoxx Europe 600 gained 0.72 percent.