JPM JP Morgan Chase and Co

By Emily Glazer 

The Federal Reserve approved J.P. Morgan Chase & Co.'s capital plan in the regulator's annual stress test released Wednesday.

J.P. Morgan's plan was approved after the Fed found that the largest U.S. bank by market value could keep lending in a severe economic downturn. The approval clears the way for the bank to reward investors by returning capital either through dividend payouts by buying back stock, or both.

The bank, along with several others, is expected to unveil plans on its quarterly dividend and share repurchase activity later in the day.

At the low point of a hypothetical recession, J.P. Morgan's common equity Tier 1 ratio -- which measures high-quality capital as a share of risk-weighted assets -- would be 6.8%, 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.

J.P. Morgan's Tier 1 leverage ratio, which measures high-quality capital as a share of all assets, would have reached as low as 5.6% in a hypothetical recession, above the 4% Fed minimum.

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.

The Fed's Wednesday results are arguably the more important part of the stress-test process since it dictates how much capital will be returned to shareholders. Increased dividends and buybacks can help to bolster a bank's share price.

J.P. Morgan passed the stress test over the past five years, though in 2013 it got a "conditional" approval due to "weaknesses in its capital plan or capital planning process," the Fed said at the time. It resubmitted its capital plan to the Fed later that year.

Last year, J.P. Morgan adjusted its capital plan to the Fed in the week between the two results, known as taking a mulligan, giving it more room to past the second test. It didn't do so this time around.

Write to Emily Glazer at emily.glazer@wsj.com

(END) Dow Jones Newswires

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

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