Final Test

Aiming to give their shareholders an early boost in 2011, the nation’s largest banks are looking to begin increasing payments on dividends, which have been either suspended or significantly reduced since the onset of the financial crisis in September of 2008. However, the Fed announced today that before any such moves take place amongst the largest U.S. banks, a “number of criteria” must first be met.

Under the guidance issued by the Fed, all 19 of the bank holding companies that participated in the Fed and Treasury-administered “stress tests” in 2009 will be required to submit capital plans—which include a demonstration of a bank’s ability to absorb losses under “adverse” economic conditions and its ability to comply with Basel III capital standards—by early 2011 for the Fed’s review. The capital plans will be submitted to the Fed, regardless of whether a bank plans to either raise dividends or repurchase stock shares. In addition, all government investments in a bank must be repaid or replaced with common or preferred stock before any dividend increases or stock repurchases take place. The Fed said it expects to begin responding to bank requests for such actions beginning in the first quarter of 2011.

The results of the Supervisory Capital Assessment Program (SCAP), or stress tests, which occurred during the spring of 2009 on the nation’s largest bank holding companies to predict “potential losses, the resources available to absorb losses, and the resulting capital buffer needed” based on various economic scenarios, revealed that ten of the 19 participating banks needed to increase their capital buffers for a combined total of $74.6 billion. SCAP was largely credited with boosting market confidence by providing a much-needed certification of the health of each bank’s balance sheet.

Federal Reserve—Revised Temporary Addendum to SR letter 09-4: Dividend Increases and Other Capital Distributions for the 19 Supervisory Capital Assessment Program Bank Holding Companies (PDF)