("Fed 'Stress Test' Results: 29 of 30 Big Banks Could Weather Economic Shock," at 4:00 p.m. ET on March 20 and several subsequent updates that day, contained incorrect numbers for banks' minimum Tier 1 capital ratios. The Federal Reserve on March 21 corrected figures for 15 banks by 0.1 to 0.5 percentage points. The corrected version follows:)

 
   By Ryan Tracy, Stephanie Armour and Dan Fitzpatrick 
 

The Federal Reserve's annual test of big banks' financial health showed the largest U.S. firms are strong enough to withstand a severe economic downturn, potentially clearing the way for banks to reward investors with dividends and stock buybacks.

The Fed said 29 of the 30 largest institutions have enough capital to continue lending even when faced with a hypothetical jolt to the U.S. economy lasting into 2015, including a severe drop in housing prices and a spike in the unemployment rate.

The results will factor into the Fed's decision next week to approve or deny individual banks' plans for returning billions of dollars to shareholders through dividends or share buybacks. The Fed's annual "stress tests" are designed to ensure large banks can withstand severe losses without needing a government rescue.

Under its "severely adverse" scenario--which projects a deep recession with surging unemployment, a steep drop in housing prices and a nearly 50% drop in equity prices over nine quarters--the Fed found the 30 banks would suffer loan losses of $366 billion. The Fed said banks are "collectively better positioned" to withstand such losses.

Thursday's test results highlight the improving health of the banking sector, which has been forced by regulators to bolster capital levels in the wake of the 2008 financial crisis. Still, several of the largest banks, including Morgan Stanley, J.P. Morgan Chase & Co., and Bank of America Corp., were ranked near the bottom of the pack in the Fed's side-by-side comparison of bank capital levels over a nine-quarter period of severely adverse economic conditions.

Bank of America was the lowest performer among the big banks, with a Tier 1 common ratio that dropped as low as 5.9% under the Fed's hypothetical scenarios. Bank of America would have lost $49 billion before taxes, the highest of any of its peers.

Only Zions Bancorp, a regional lender based in Salt Lake City, posted capital levels during the two-year downturn scenario that failed to meet the Fed's minimum standards. The Fed said Zions had a Tier 1 common capital ratio of 3.6%, below the Fed's 5% minimum. Zions has said previously it will likely resubmit its capital plan to the Fed in light of its selling certain debt securities as a result of the Volcker rule, which the Fed and other regulators adopted in December.

Write to Ryan Tracy at ryan.tracy@wsj.com, Stephanie Armour at stephanie.armour@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com

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