By Christina Rexrode 

Bank of America Corp. got a green light on the Federal Reserve's stress test, and the bank announced it would return more capital to shareholders.

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 bank said it would increase its quarterly dividend to 7.5 cents a share, from 5 cents. It also received permission to buy back up to $5 billion of its own shares in the coming year, up from last year when it asked for $4 billion over five quarters.

The Fed's approval gives breathing room to CEO Brian Moynihan, who has been under pressure to improve the bank's credibility with regulators. The bank had fumbled three of the past five exams, a record worse than other major U.S. banks.

The Fed's approval is also particularly important to the bank because many investors have been disappointed by its relatively low dividend and share price. This marks just the second time since the financial crisis that the bank has increased its dividend.

The bank's increased dividend payout was in line with analysts' estimates, and the stock rose in after-hours trading. "Over the last few years, we have significantly strengthened our company and increased our earnings as we execute a straightforward strategy focused on responsible growth," Mr. Moynihan said in a statement.

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 bank might have also been helped by taking a more conservative tack on its submission. Generally, the banks are more optimistic than the Fed is about how they would fare in a severe recession. But last week, on the first round of stress-test results, Bank of America estimated that a key capital ratio would fall lower than the Fed did.

The latest stress-test result assesses how the banks would fare in a severe recession that 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.

The Fed found that at the low point of the 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.

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

 

(END) Dow Jones Newswires

June 29, 2016 17:34 ET (21:34 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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