WASHINGTON — Some of the largest 19 U.S. bank holding companies will be allowed to restart and increase their dividend payments to shareholders this quarter, the Federal Reserve Board said Friday.
Banks including Ally Financial Inc., The Bank of New York Mellon Corp., JPMorgan Chase & Co., will be notified no later than March 21 of the Fed's decision, the central bank said.
But banks who are allowed to proceed following a comprehensive second round of stress testing by the Fed will have to operate under heightened requirements by their supervisors, the central bank said.
For example, firms will be expected to grow their capital base. They will also have to demonstrate their ability to remain viable financial intermediaries as they make planned capital distributions even under stressed conditions. Dividends will be limited to 30% or less of anticipated earnings, the Fed said.
Still, not all the firms will be making a capital distribution this quarter. The central bank said some banks did not ask to be allowed to pay a dividend. For others, examiners may have judged the requested distribution was "too high" at this time, or supervisors were not comfortable with the bank's capital planning process, the Fed said.
Firms will, however, be allowed to submit capital proposals each quarter.
Since February 2009, the central bank has advised banks to hold off on substantially increasing or eliminating their dividend payments. Increasing capital distributions, the Fed said at the time, would not be considered prudent without a well-developed capital plan and capital position.
But with significant improvements in economic conditions and capital held by banks, the Fed agreed to allow certain banks to proceed with dividends, share repurchase programs or repayment of government capital.
Even so, it said that it will proceed cautiously.
"The Federal Reserve is taking a measured and conservative approach in considering such capital distributions by the largest bank holding companies, given continued uncertainty around the pace and strength of the economic recovery in the United States and abroad, and the extraordinary nature of the 2007-2009 financial crisis," the Fed said.
Common equity, the Fed said, increased by more than $300 billion at the 19 largest U.S. bank holding companies from the end of 2008 through 2010. In total, the 19 bank holding companies have added roughly $25 billion in retained earnings to common equity since the end of 2008.
"Overall, both the quantity and quality of capital at many large bank holding companies have improved since the financial crisis, with the weighted average Tier 1 common ratio for the 19 SCAP bank holding companies rising from 5.4% as of 4Q 2009 to 9.4% as of 4Q 2010, reflecting an overall increase in Tier 1 common capital of $275 billion at these firms," the Fed said.
The Fed's assessment, which it explained in its 22-page report, fell into five categories, which included questions pertaining to banks' capital adequacy processes, capital distribution policy, as well as providing a credible plan for meeting new regulatory requirements under Basel III and Dodd-Frank.
The banks were also asked to provide quarterly projections of their revenue, losses and pro forma capital positions over a 9-quarter period from fourth quarter of 2010 to fourth quarter of 2012 under three scenarios.
The Fed wanted to know the bank's regulatory capital ratios — Tier 1 ratio, total capital ratio, and leverage ratio — under three circumstances: its projections of the most likely path of the economy; stress on its key sources of revenue and most vulnerable sources of loss; and an adverse "supervisory stressed scenario" created by the Fed.
At the end of April, all 19 banks will receive detailed assessments of their comprehensive capital plans and internal capital assessment process including feedback on areas where plans could be strengthened.
Holding companies are expected to submit comprehensive capital plans to the Fed on a yearly basis to describe their strategies for managing their capital over a 24-month period. The annual report would detail all planned capital actions, and potential changes to the firm's risk; the firms assessment of potential losses, earnings, and other resources available to absorb such losses under stress, and more.
Those plans would have to be approved by the firm's board before being submitted to the Fed.
