WASHINGTON — The nation's largest banks must undergo new stress tests to show they can weather another recession, and the Federal Reserve said those that pass them can boost dividends paid to investors.
Banks would need to show the Fed's bank examiners that they're in good financial health and that they have adequate capital to absorb potential losses over the next two years.
The Fed oversees Wall Street's biggest banks, including Citigroup, Bank of America, JPMorgan Chase & Co., and Wells Fargo.
Banks have to file plans to the Fed showing that they would have sufficient capital cushions to cover any losses under different economic scenarios – including if the economy were to fall back into a recession, Fed officials said.
All of the 19 largest banks overseen by the Fed must file the plans – even if they don't intend to increase their dividend payments. The plans must be filed by Jan. 7, 2011.
The upcoming round of "stress tests" are a key part of the Fed's ongoing efforts to make sure that banks – and the entire financial system – are stable. The safety and soundness of the banking system is an important ingredient to the economy's health.
Banks that don't pass the stress tests will have to take steps to raise new capital to build up their cushions.
On Wall Street, banks' stock prices tumbled after the Fed released the guidelines. Bank of America's stock price dropped 2.68 percent. Wells Fargo's fell 1.21 percent, JPMorgan Chase's declined 1.09 percent and Citigroup's stock price slid 0.71 percent.
The Fed's first stress tests were conducted in 2009 as the country was still reeling from the worst recession and financial crisis since the 1930s. Those results were made public in a move to boost confidence in the then-fragile U.S. banking system. The results of the upcoming exams, however, won't be made public, Fed officials said. That's in line with banking regulators' long tradition of keeping such information confidential.
Banks wanting to boost their dividends also would need to show the Fed they have a plan to comply with stricter global capital requirements recently agreed to in Basel, Switzerland.
And banks would need to repay the federal government any bailout money received during the financial crisis before they can boost their dividend payments.
During the financial crisis, banks cut their dividend payments. By boosting their payments, banks may be able to attract new investors. JPMorgan Chase is among the banks interested in boosting dividend payments.
JPMorgan Chase CEO Jamie Dimon has said he'd like to increase the bank's annual dividend to between 75 cents and $1 a share. It is currently 20 cents a share.
The Fed hopes to move quickly to complete the stress tests. Banks that satisfy the guidelines should be able to boost their dividends in the first quarter of 2011, Fed officials said.
Pallavi Gogoi in New York contributed to this report.