BAC Bank of America Corporation

By Christina Rexrode 

Bank of America Corp. finally got a green light on the Federal Reserve's stress test.

The Fed on Wednesday approved Bank of America's capital plan after determining that the bank could keep lending in a severe economic downturn. The approval clears the way for the company to raise dividends, increase share buybacks, or both.

The Fed's approval gives breathing room to CEO Brian Moynihan, who needs to show that he can discern what regulators want. The bank had fumbled three of the past five exams, a record worse than any of the other major U.S. banks.

The Fed's approval is also particularly important to the bank because many investors have been disappointed by the bank's relatively low dividend and share price. The bank is expected to announce later Wednesday its plans for its dividend and buybacks, both of which can increase a company's share price.

The Fed found that at the low point of a hypothetical recession, Bank of America's common equity Tier 1 ratio -- which measures high-quality capital as a share of risk-weighted assets -- would be 7.1%, above the 4.5% level the Fed views as a minimum. The new ratio, unlike the one reported last week by the Fed in a related test, takes into account the bank's proposed capital plan.

The bank's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, would be 5.9% in a hypothetical recession, above the 4% Fed minimum.

Last year the Fed told Bank of America that it had concerns about its ability to assess its own risk, and in 2014 the bank had to redo its test after discovering an error in the way it calculated capital. To lead the latest test, Mr. Moynihan tapped his ally and longtime human-resources chief, Andrea Smith, in a bet that the bank needed a project manager more than a number cruncher.

The latest stress-test result incorporates quantitative factors assessed in data released by the Fed last week. These included a simulation of how the bank's capital buffers would hold up under a world-wide recession. The Fed's "severely adverse" scenario of financial stress this year included a 10% U.S. unemployment rate, significant losses in corporate and commercial real estate lending portfolios, and negative rates on short-term U.S. Treasury securities.

This second part of the test also included a qualitative assessment by the Fed of a bank's capital-planning process and internal controls. The Fed has the ability to object to a bank's capital plan on either quantitative or qualitative grounds.

Write to Christina Rexrode at christina.rexrode@wsj.com

(END) Dow Jones Newswires

June 29, 2016 16:44 ET (20:44 GMT)

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