In a blow to two major Wall Street banks, the Federal Reserve told Goldman Sachs and JPMorgan Chase that they must fix flaws in how they determine capital payouts to shareholders, but still approved their plans for share buybacks and dividends.
The Fed said JPMorgan and Goldman would have to submit new plans by the end of the third quarter. A senior central bank official declined to identify specific problems.
In the second phase of the Fed's annual stress tests of the 18 largest U.S. banks, the regulator said on Thursday that it had approved 14 firms' capital plans without any strings attached.
The Fed vetoed submissions by BB&T Corp and Ally Financial.
The results show the Fed is keeping a tight leash on the nation's big banks five years after the U.S. financial crisis.
The annual testing has become a key tool for regulators to ensure that banks are not eating too much into their capital cushions, by examining how banks would weather a hypothetical major market shock.
Last week, in the first set of stress test results, the Fed said that without their planned capital distributions, major U.S. banks overall had enough capital to withstand a severe economic downturn.
Ally Financial was the only bank last week that failed to meet the minimum hurdle of a 5 percent capital buffer in the Fed's test, which assumed a spike in unemployment to 12.1 percent and a 50 percent drop in share prices.
The Fed also uses the tests to determine whether banks are in a position to pay out dividends or buy back shares.
The tests have become a source of tension between banks and the Fed. Some banks last week released results of their own tests, calculated using the same scenarios the Fed used.Many banks scored themselves higher than the Fed did.
The Fed reprimanded JPMorgan and Goldman based on "qualitative" concerns, not their capital ratios. That could confuse investors, said Ernie Patrikis, a former New York Fed official who is now a partner at the law firm White & Case.
"It's a strange public process because to us it all looks kosher, but the Fed is saying, 'No, it's not kosher because we know more than you do about the numbers,'" Patrikis said.
In after-market trading, shares of Goldman Sachs and JPMorgan fell 2 percent, while BB&T shares fell 3.1 percent.
The Fed said JPMorgan and Goldman Sachs each had "weaknesses in its capital plan or capital planning process that were significant enough to require immediate attention, even though those weaknesses do not undermine the quantitative results of the stress tests."
Tom Day, senior director of stress testing and capital planning at Moody's Analytics, foresaw few problems for the two Wall Street banks. "I don't expect that Goldman and JP will have anything but approval when they resubmit," he said.
The two can move forward with any plans for dividends or share buybacks, but they will have to submit new plans to the Fed at the end of the third quarter. If the Fed deems those plans insufficient, it could order the banks to halt any new capital distributions, the senior Fed official said.
"We are pleased to continue to have the flexibility to return capital to shareholders," Goldman Chief Executive Lloyd Blankfein said in a statement. The company said it would resubmit its capital plan with enhancements by the end of the third quarter.
"JPMorgan Chase is fully committed to meeting all of the Fed's requirements," CEO Jamie Dimon said in a statement.