Goldman Sachs and JPMorgan Chase, the Wall Street giants that emerged from the financial crisis in a position of strength, are now facing questions about their ability to withstand future market shocks.
On Thursday, the Federal Reserve said Goldman and JPMorgan would need to resubmit their proposals to pay out billions of dollars to shareholders, citing “weaknesses†in their capital plans. In contrast, two of the nation’s most troubled banks during the crisis, Citigroup and Bank of America, got a green light from regulators for their plans to reward shareholders.
The Fed’s rebuke to Goldman and JPMorgan highlights the growing tension as regulators try make sure banks are better prepared for the next market shock. With profits improving, financial institutions want to enrich investors by increasing their dividends and buying back shares. But regulators want banks to be cautious with their capital, in case they face future losses.
Regulators are trying to prevent a repeat of 2008, hen the banking industry brought the financial system to the brink and many institutions had to be bailed out by taxpayers. To guard against future problems, Congress mandated that regulators annually test the financial strength of large banks. As part of that effort, regulators can now stop banks from paying out capital, which lenders could previously do with little oversight.
Last week, the Fed released the results of this year’s so-called stress tests, which assess the ability of the banks to withstand severe financial and economic shocks. The test showed that banks have substantially increased their capital levels since the financial crisis, although JPMorgan and Goldman Sachs lagged many of their peers under various scenarios.
Still, analysts expected both banks to gain outright approval for their plans to distribute capital to shareholders through dividend payments and stock buy backs. Both firms have shown an ability to generate solid profits since the crisis, though JPMorgan stu! mbled badly last year when it suffered big trading losses.
While the Fed has allowed to JPMorgan and Goldman to move forward with their capital plans, the regulators said the proposals “exhibited weaknesses†that were “significant enough to require immediate attention.†The banks will now have to address the shortcomings and resubmit them by the end of September.
If they aren’t fixed by then, the Fed may block their capital plans. The Fed already objected to the capital plans proposed by, Ally Financial and BB&T, two smaller banks.
Bank of America and Citigroup will see the approval of their plans as an important milestone in their efforts to heal themselves. The Fed in previous years objected to their plans.
