Banks face another round of stress tests
WASHINGTON — The nation’s largest banks must undergo new stress tests to show they could weather another recession, and those that pass them can boost dividends paid to investors, the Federal Reserve said.
Banks will need to show they are in good financial health, with adequate capital to absorb potential losses over the next two years.
Banks have to file plans showing they are prepared for different scenarios — including if the economy were to fall back into a recession.
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 — by Jan. 7.
The upcoming stress tests are a key part of the Fed’s effort to make sure the entire financial system is stable.
Banks that don’t pass will have to raise new capital.
On Wall Street, banks’ stock prices tumbled after the Fed released the guidelines. Bank of America’s stock dropped 2.68 percent. Wells Fargo’s fell 1.21 percent, JPMorgan Chase’s declined 1.09 percent, and Citigroup’s declined 0.71 percent.
The 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 banking system. The results of the upcoming exams won’t be made public — in line with regulators’ long tradition of keeping such information confidential.
Banks wanting to boost their dividends also need to show they have a plan to comply with stricter global capital requirements recently agreed to.
And banks would need to repay the federal government any bailout money received during the financial crisis before they could boost their dividend payments.
During the financial crisis, banks cut dividend payments. By boosting their payments, banks may be able to attract new investors.
JPMorgan Chase’s chief executive, Jamie Dimon, has said he would like to increase the bank’s annual dividend to between 75 cents and $1 a share. It is currently 20 cents.
Banks that satisfy the guidelines should be able to boost their dividends in the first quarter of 2011, Fed officials said.