The US central bank wants banks to be careful about raising dividends even as the economy improves, Federal Reserve Governor Daniel Tarullo said on Friday . "We are going to proceed in a conservative fashion," he said in an interview on CNBC television. "This is not a fully normalised financial environment. There are still risks out there."
He said the Fed has received capital plans from 19 of the largest banks, and some want to boost dividends. "We will be looking at each of those capital plans to assess the present capital position of the firm and also ... the expectation of what might happen to the firm in a stressed environment," Tarullo added. The Fed will decide by about March 21 which of these institutions can boost their dividend payments, Tarullo said.
Banks that want to increase dividend payments will have to meet strict standards laid out by the Fed. They will have to show they can absorb losses over the next two years under situations where there are broad economic problems and problems specific to a firm's business model.
Banks will also have to show that they will be able to meet the new international capital standards in the Basel III agreement as well as how they will deal with any impact the new financial reform law will have on their business models. The Fed said banks would be expected to repay any government funding they have received before boosting dividends.
Tarullo said banks that want to increase their dividends should be able to maintain a common equity ratio above 5 percent during the stress scenarios the Fed will use to evaluate their capital plans. He said banks have been asked to run their own stress tests and report the results to the Fed, adding that central bank regulators were "looking for sound and rigorous internal stress testing" by each institution.
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