The Federal Reserve said Thursday that Wall Street’s two last independent investment banking powerhouses will not be permitted to raise dividends of share buybacks.
Regulators said that the capital levels of both Goldman Sachs and Morgan Stanley would fall below regulator minimums in the Fed’s theoretical stress scenario if they increased capital distributions. Data released last week showed that both banks passed the Fed’s stress tests but without much room for error.
The inability to raise dividends or buybacks will likely surprise many investors because both banks said last week that the first round stress test results were not necessarily indicative of a constraint on raising capital distributions.
Four other banks–JPMorgan, American Express, KeyCorp and M&T–were forced to pare down their capital return plans in the second round of the stress tests, in which the Fed examines both the strength of the bank’s capital positions and their internal processes for evaluating capital planning.