The Fed's findings signalled its confidence that the financial system, which nearly collapsed 3 1/2 years ago, is healthy again.
J.P. Morgan Chase, Wells Fargo and other large bank holding companies that passed the Fed's so-called stress tests raised their dividends and announced plans to buy more of their stock. The news ignited a late-day rally on Wall Street. The Dow Jones industrial average shot up 218 points to its highest close 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 non-partisan policy think-tank .
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 3 per cent 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 tests were Ally Financial, SunTrust and MetLife.
The Fed released the results two days earlier than planned after JPMorgan Chase sent out a press release late Tuesday saying it had passed the test.
The Fed reviewed the balance sheets of 19 bank holding companies to determine whether they could withstand a severe crisis: unemployment at 13 per cent, stock prices falling 60 per cent over two years and home prices plunging 21 per cent from today's levels.
The overall financial system is much stronger than it was in 2009. In the first quarter of that year, the 19 companies stress-tested by the Fed held $420 billion in cash and assets easily convertible to cash. That figure climbed to $759 billion by the end of 2011.
The banks that passed the stress tests celebrated with announcements of increased dividends and plans to buy back their own shares:
— JPMorgan Chase & Co. will increase its dividend to 30 cents per share from 25 cents and plans to buy back $15 billion of its stock by the first quarter of 2013. The company's outstanding stock is currently worth $136.7 billion.
— U.S. Bancorp will boost its annual dividend to 78 cents per share from 50 cents and buy back up to 100 million shares of its stock.
— Wells Fargo & Co. said it will increase its dividend to 22 cents per share from 12 cents.
The Fed can bar the banks that failed the test from paying dividends or buying back their own stock. It can also force them to raise money by selling additional stock or issuing debt.
The Fed didn't order any of the banks that failed its test to raise specific sums. However, it won't allow them to increase dividends or buy back shares, and it told them to submit plans within 30 days outlining how they plan to get stronger.
The Fed has conducted the stress tests each year since 2009. The Fed did not publicize the results of its tests in 2010 or 2011. After the first round of tests, in 2009, the Fed ordered 10 banks to raise a total of $75 billion. Bank of America Corp. alone was told to raise $34 billion.
Citigroup Inc. said in a statement that it plans to keep paying out its quarterly dividend of 1 cent a share.
Insurance company MetLife Inc. said it was "deeply disappointed" with the Fed's findings. It had previously announced plans to free itself from the Fed's oversight by selling off its bank division.
SunTrust Banks Inc. said it will maintain its quarterly dividend, now at 5 cents a share. In a statement, bank executives indicated SunTrust's finances are solid and said they expect first-quarter profits to top Wall Street's estimates.
Ally Financial Inc., the former GMAC Bank, was the worst performing bank in the Fed's test. The U.S. Treasury still owns 74 per cent of the bank. Ally protested the Fed's stress tests, saying that the analysis overstated the potential mortgage risk in its portfolios.
This year's test was more rigorous, the Fed said, so it could be assured that the industry was prepared to meet more stringent international banking rules that go into effect in 2013. The Fed said it also looked more closely at hypothetical loan losses from credit cards and mortgages.
The Fed wants banks to show they could not only withstand the crisis but keep lending to Americans and businesses.
Some analysts said the Fed's tests don't adequately capture all of the risks banks still face from bad real estate investments on their books.
Christopher Whalen of the bank-ratings firm Institutional Risk Analytics said regulators "are still trying to pretend that real estate is not a problem."
Gogoi reported from New York. AP Business Writer Daniel Wagner contributed from Washington.