(Bloomberg) -- The biggest US banks passed the Federal Reserve’s annual stress test, paving the way for higher shareholder payouts as the industry awaits a watered-down version of a separate proposal for stricter capital rules. 

Each firm stayed above its minimum capital requirements during a hypothetical recession, the Fed said in a statement Wednesday. Altogether, the group would take nearly $685 billion in losses — driving a larger drop in capital than in last year’s scenario but “within the range of recent stress tests,” the regulator said. 

This round of the annual exam, a product of the 2008 financial crisis, included 31 banks, each with at least $100 billion in assets. For the group as a whole, the so-called common equity tier 1 capital ratio — considered the highest-quality regulatory capital — would bottom out at 9.9%, well above the 4.5% minimum requirement. 

“The goal of our test is to help to ensure that banks have enough capital to absorb losses in a highly stressful scenario.” Michael Barr, the Fed’s vice chair for supervision, said in a statement. “This test shows that they do.”

This year’s “severely adverse” scenario included a 10% peak in US unemployment, a 55% drop in equity prices and a 40% decline in commercial real estate prices. As with last year, a subset of firms with large trading businesses faced an additional “global market shock” component involving equity price declines, a sharp rise in short-term Treasury rates and a weaker dollar. 

The Fed also flagged potential risk tied to big banks’ exposure to hedge funds, citing an additional analysis that doesn’t count toward capital requirements. 

Although every firm passed, results varied among them. At JPMorgan Chase & Co., the biggest US bank, the CET1 ratio would decline to 12.5%, from 15% at year-end. Among the megabanks, Wells Fargo & Co.’s CET1 fell to the lowest level at 8.1%, from 11.4% at year-end. That they’re so far above the minimum is likely to bolster their case against additional dramatic increases. 

In addition to the test itself, the results inform the stress capital buffer that banks have to maintain as an additional cushion against losses. Shares of several firms that saw their CET1 ratios drop to lower levels than peers, including Wells Fargo and Goldman Sachs Group Inc., fell in after-hours trading. The central bank expects aggregate stress capital buffers to go up modestly, according to a senior Fed official. 

Wednesday’s results underscore “the usefulness of the extra capital that banks have built in recent years above their minimum requirements,” Barr said. “Because of that extra capital cushion, we expect that large banks would be able to continue extending credit to households and businesses during a time of financial stress.”

Lobbying Blitz

Capital requirements have been a topic of fierce debate in Washington in the year since the last stress test. Last July, the Fed and other regulators unveiled a long-awaited plan for more stringent rules that they said would result in a 16% hike for banks with more than $100 billion in assets. 

Bank bosses launched a lobbying blitz, arguing they already have enough capital and the new rules would hurt consumers and businesses. They pushed for major revisions or scrapping the plan entirely, and earlier this year Fed Chair Jerome Powell said there would be “broad and material changes.” 

Still, Barr re-emphasized the need for banks to hold onto more capital in the statement Wednesday. He attributed the higher losses this year to higher credit card balances and delinquencies; riskier corporate credit portfolios; and a combination of higher costs and lower fee revenue in recent years driving less net income to counter losses. Those three factors “suggest required capital buffers should be larger,” Barr said. 

The Fed has shown the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency a three-page document of possible revisions to last year’s proposal that would soften the capital increase to as little as 5%, Bloomberg News reported Monday. Officials haven’t reached an agreement, and it’s unclear whether they can finish a revised plan before the US presidential election in November. 

The biggest US banks have signaled optimism about their capital levels this year, ramping up buybacks even ahead of the stress test results. The six largest lenders bought back more than $14 billion of stock in the first quarter, a 73% jump from the pace in the second half of last year. Executives have touted excess capital in recent months, including a surprise dividend hike at JPMorgan that CEO Jamie Dimon said was because “our capital cup runneth over.” 

The Fed said Wednesday that it expects banks to wait until after 4:30 p.m. in New York on Friday to publicize any plans for dividends and buybacks.

(Updates with additional details, share moves beginning in sixth paragraph.)

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