WFC Wells Fargo and Company

By Emily Glazer 

The Federal Reserve approved Wells Fargo & Co.'s capital plan in the regulator's annual stress test released Wednesday.

Wells Fargo'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 San Francisco-based firm to reward investors by returning capital -- either through dividend payouts or 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, Wells Fargo's common equity Tier 1 ratio--which measures high-quality capital as a share of risk-weighted assets--would be 6.1%, 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.

Wells Fargo's Tier 1 leverage ratio would have reached as low as 5.8% 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 worldwide 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.

Wells Fargo also passed last year but certain capital and leverage results were down more than 0.5 percentage points from its year-earlier results.

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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