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A Bay street sign is seen in Toronto’s financial district.Mark Blinch/The Globe and Mail

Toronto-Dominion Bank, Bank of Montreal and a majority of the large U.S. banks passed the second part of the Federal Reserve's annual stress tests, giving them the green light to buy back shares, pay out dividends and make acquisitions.

The passing grade comes as the big Canadian banks increasingly turn to the United States to boost their business. It will allow the banks to proceed with any potential plans to expand their footprint south of the border.

Among the 34 banks that were stress tested, Capital One Financial Corp. was the only that received a "conditional non objection" pass from the Federal Reserve. Capital One must submit a new capital plan to the Fed within six months that corrects weaknesses with the oversight and execution of its capital planning practices.

The largest U.S. banks have been stress tested every year since the U.S. housing market collapsed and triggered a global economic crisis in 2008-09.

The banks are examined to ensure they have the capital and liquidity to withstand adverse financial conditions while continuing to provide credit to households and businesses. This year, the banks passed the two-part stress tests with flying colours.

The Fed's made up scenario put the 34 banks through a "severe" global recession, where the U.S. jobless rate jumped 5.25 percentage points to 10 per cent and commercial real estate prices dropped 35 per cent.

"The nation's largest banks are on solid financial ground. They raised a lot of capital since the crisis," said Mark Zandi, chief economist with Moody's Analytics.

"Capital is not a constraint. Liquidity is not a constraint. From that perspective, they are well positioned if they wanted to expand and grow in the U.S.," he said.

Although TD and BMO had to submit capital plans, their stress tests were not as rigorous as the more complex banks, such as Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp. Those banks also had their internal controls, governance practices and risk management assessed under the "severe recession" scenario.

Royal Bank of Canada also submitted a plan to the Fed. But RBC was only part of the Fed's trial stress test since it recently became a bank holding company with its acquisition of L.A.'s City National. Results from RBC's capital plan will be made public next year.

The stress tests began in 2009 and were designed to restore confidence in the banking system.

This marked the first round of stress tests under the Trump administration, which wants to roll back the massive Dodd-Frank regulation bill that made the annual tests law. U.S. Treasury Secretary Steven Mnuchin has proposed weakening the stress-test regime, by making them less frequent and sparing the smaller banks. Mr. Zandi said it was a good idea to give relief to the smallest banks.

"My guess is the next financial crisis will not come from the banks, it will come from the non-banking part of the system," Mr. Zandi said. "By asking banks to hold more capital, you are raising the odds that the next crisis will come from the shadow banking system."

Canadian Imperial Bank of Commerce, which recently bought Chicago's PrivateBancorp Inc., said it will not be subjected to the Fed's annual exams as it falls below the required $50-billion in U.S. assets.

Som Seif, CEO of Purpose Investments discusses preparing your finances and investment portfolio for a Bank of Canada interest rate hike

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 4:15pm EDT.

SymbolName% changeLast
TD-T
Toronto-Dominion Bank
-0.63%81.75
TD-N
Toronto Dominion Bank
-0.43%60.38
COF-N
Capital One Financial Corp
+3.03%148.89
BMO-T
Bank of Montreal
+1.13%132.25
BMO-N
Bank of Montreal
+1.35%97.68
GS-N
Goldman Sachs Group
+0.59%417.69
JPM-N
JP Morgan Chase & Company
+0.39%200.3
BAC-N
Bank of America Corp
+0.29%37.92

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