Goldman Sachs and JPMorgan Chase have finally overcome a regulatory rebuke that had been hanging over both banks since the Federal Reserve performed stress tests this year on large financial firms.
In March, Goldman and JPMorgan passed the tests, which are held annually and are designed to assess whether banks have the financial strength to get through sharp downturns in the economy and the markets. But in an unexpected reproach, the Fed said that it had identified significant weaknesses in the plans that JPMorgan and Goldman had submitted to show what might happen to their capital during periods of stress.
The regulator told Goldman and JPMorgan to come up with improved capital plans, and it threatened to stop the banks from paying out dividends and performing stock buybacks if the perceived flaws were not addressed.
On Monday, the two banks effectively put the matter behind them when the Fed announced that it did not object to plans that the firms had resubmitted.
In a statement, Jamie Dimon, the chief executive of JPMorgan, said the bank was pleased that its resubmitted plan had met the Fed’s expectations. Goldman had no comment other than a statement saying that the Fed had not objected to its plan.
The Fed’s dissatisfaction over the capital plans of Goldman and JPMorgan was a shock at the time, because both firms were expected to pass the tests without any problems. Some of their rivals passed the tests without hitch, including Bank of America and Citigroup, which both stumbled badly during the 2008 financial crisis.
When it came to JPMorgan and Goldman, the Fed had some concerns about the banks’ forecasts for losses and revenues in a crisis scenario, said a senior official at the Fed who spoke at the time under the condition of anonymity.
The stress tests were instituted by the Dodd-Frank Act of 2010, which requires regulators to take far-reaching steps to make the financial sector stronger and fairer. The stress tests focus on capital because it is the financial buffer that banks maintain to absorb losses that might result from loan defaults and plunging bond prices.
When performing the stress tests, banks have to work out how much capital they would have left after projecting the losses they might suffer during a deep recession. Dividend payments and stock buybacks also erode capital. As a result, banks have to assess their impact, too, in the capital calculations.
In March, the Fed turned down the capital plans of two smaller banks, Ally Bank and BB&T. The Fed prevented both from carrying out their plans to distribute capital until their plans had been fixed. The regulator approved BB&T’s resubmitted plan in August and Ally’s in November.
