All but 4 of 19 U.S. banks pass stress test

All but four of 19 major U.S. banks got a green light Tuesday to boost dividends and buy back shares after the Federal Reserve declared them strong enough to survive another serious recession.

One notable exception was Citigroup, the nation's third-largest bank. It was among the companies the Fed said lacked enough capital to withstand another severe economic and financial crisis. Its stock price fell by as much as 4 percent in after-hours trading. The Fed announced the results after markets had closed.

The other three financial institutions that did not pass the Fed's hypothetical stress test were Ally Financial, SunTrust and MetLife.

The Fed released the results two days earlier than planned after JPMorgan Chase sent out a news release saying it had passed the test.

JPMorgan, Wells Fargo and other large bank holding companies that passed the Fed's so-called stress tests announced they would return capital to shareholders, igniting a late-day rally on Wall Street. The Dow Jones industrial average rose 218 points and closed at its highest level since the end of 2007.

"It's clearly good news -- the U.S. banking system can now withstand a quite severe recession without falling over," said Douglas Elliott, a fellow at the Brookings Institution, a nonpartisan policy think tank.

The Fed reviewed the balance sheets of 19 bank holding companies to determine whether they could withstand a crisis that sends unemployment to 13 percent, cuts stock prices in half and lowers home prices 21 percent from today's levels.

For those banks that failed, the Fed can stop them from paying stock dividends or buying back their own stock. The Fed can also force them to raise money by selling additional stock or issuing debt.

After last year's stress tests, the Fed allowed some banks -- including JPMorgan Chase and Wells Fargo -- to raise their dividends because they were deemed healthier.

The Fed has conducted the stress tests each year since 2009. The Fed didn't publicize results of tests in 2010 or 2011.

The Fed wants banks to show they could not only withstand the crisis but keep lending to Americans and businesses. Restricting lending during a crisis, as the banks did in 2008, makes the economic toll worse.