Federal Reserve orders Bank of America to revise dividend and buyback plans

Bank of America must revise its plans for increasing dividends or buying back its own stock, the Federal Reserve has ordered, citing gaps in the bank’s risk planning.

The Fed announced the decision Wednesday as part of its “stress tests” — an annual checkup of the nation’s biggest financial institutions. This year, 31 banks were tested to determine whether they have large enough capital buffers to keep lending through another financial crisis and severe economic downturn.

The central bank is also barring U.S. divisions of two European banks from paying any dividends, saying their planning for financial risks is inadequate. Those divisions belong to Germany’s Deutsche Bank and Spain’s Santander.

The remaining 28 banks can raise dividends or buy back shares.

The notable “pass” among the 31 banks was Citigroup. The bank did not pass last year and Citi CEO Michael Corbat was under tremendous shareholder pressure to make sure Citi got through. Industry analysts had said previously that if Citi did not pass this time, Corbat could have lost his job.

“Citi doing as well as it did is a big positive sign for the industry as a whole,” said Nancy Bush, an industry analyst with NAB Research.

Bank of America, the second largest U.S. bank, has until Sept. 30 to submit a revised capital plan. If the new plan is acceptable to the Fed, the bank will be able to pay higher dividends to investors or buy back shares. If not, it will be barred from doing so but will be able to maintain its current dividend.

In the stress tests in 2013, JPMorgan Chase & Co. and Goldman Sachs were required by the Fed to revise their capital plans.

This year, Wall Street powerhouses JPMorgan, Goldman and Morgan Stanley revised their capital plans to reduce their dividend payouts or share repurchases late last week after the initial results of the stress tests.

The dividends and share buybacks plans that the Fed considered are important to ordinary investors and to banks. The banks know that their investors suffered big losses in the financial crisis and they are eager to reward them. Some shareholders, especially retirees, rely on dividends for a portion of their income.

But raising dividends is costly, and regulators don’t want banks to deplete their capital reserves, making them vulnerable in another recession. Buybacks also are aimed at helping shareholders. By reducing the number of a company’s outstanding shares, earnings per share can increase.

It was the second straight year that the Fed rejected the plans of Santander, which is one of the biggest banks in Europe. Deutsche Bank, Germany’s biggest bank, was added to the testing roster for the first time this year. Santander and Deutsche Bank have extensive U.S. operations, with about $118 billion and $55 billion in assets.

Still, a Fed official noted that Santander’s U.S. division represents less than 10 percent of its global operations. The affected part of Deutsche Bank’s U.S. operations is small, only 12 to 14 percent of the U.S. division.

The Fed said Santander’s U.S. operation showed “widespread and critical deficiencies” with regard to governance, planning for risk and other areas. The affected part of Deutsche Bank’s operations showed “numerous and significant deficiencies” in identifying risks and projecting revenues and losses, the regulators said.

The regulators approved requests from the 28 other tested banks. They include JPMorgan, Citigroup and Wells Fargo & Co., which with Bank of America are the four biggest U.S. banks by assets.

This story was originally published March 11, 2015 at 5:09 PM with the headline "Federal Reserve orders Bank of America to revise dividend and buyback plans."