WASHINGTON — Big banks will need to show they meet high capital hurdles to restore or increase dividends they slashed during the financial crisis, a top Federal Reserve official said Friday.

Fed Governor Daniel Tarullo said the U.S. central bank would soon issue guidelines he expects to be "conservative" on how banks will be able to change their dividend policy in the first quarter of next year.

"We will expect firms to submit convincing capital plans that demonstrate their ability to absorb losses over the next two years under an adverse economic scenario that we will specify, and still remain amply capitalized," Tarullo said.

He was speaking at a George Washington University Law School conference on whether the regulatory overhaul approved in July adequately addresses the causes of the recent financial crisis.

Tarullo said the Fed will also expect that firms will have a sound estimate of any significant risks that may not be captured by the stress testing, such as potential mortgage putback exposures, and the capacity to absorb any consequent losses.

The Fed official also touched on the recent mortgage foreclosure documentation imbroglio, saying it stands to hurt a still weak housing sector, banks and homeowners.

"While some banks and other industry participants have stepped forward to increase the rate of modifications relative to foreclosures, many have not done enough," Tarullo said.

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