Fed deems several major banks healthy enough to boost dividends

By Neil Irwin
Saturday, March 19, 2011; 1:03 PM

The nation's large banks have made major progress rebuilding capital levels that had been depleted during the financial crisis, the Federal Reserve said Friday, as it gave many of the firms the green light to pay dividends to their shareholders.

Fed regulators applied a "stress test" to the 19 largest U.S. banks, similar to the one performed in the spring of 2009, to establish whether they would continue to have enough capital even if the economy went back into recession. The Fed examined what would happen to the banks' finances if unemployment rose to 11 percent by the end of this year, up from 8.9 percent last month.

The banks added more than $300 billion in common equity, the most basic form of capital, from 2008 to 2010, the Fed said. This gave the firms a greater cushion against future losses than they had during the financial crisis.

Although the Fed did not detail the finances of individual firms, several major banks were deemed healthy enough that they immediately announced plans Friday to pay higher dividends to shareholders or buy back stock, either of which would reduce their capital levels.

By giving its blessing to those actions, the Fed is signaling that bank operations are returning to normal after three years in which the firms suffered severe losses and most halted payments to shareholders in order to rebuild capital.

"This tells us that the big banks have made a major recovery," said Douglas Elliott, a fellow at the Brookings Institution. "The big firms that dominate the banking system are in much better shape than they were, and a few of them are in good enough shape to increase their dividends."

That should leave them in a better position to increase lending and thus help support the economy, Elliott added.

J.P. Morgan Chase said Friday it will increase its quarterly dividend fivefold and buy back as much as $15 billion in stock. Wells Fargo announced a special dividend and share buy-back. And Goldman Sachs said it will buy back $5 billion of preferred stock that it sold to Warren Buffett's firm, Berkshire Hathaway, in a hastily assembled deal during the height of the financial crisis. Buffett is a member of The Washington Post Co. board.

Other banks announcing plans to increase their dividends included BB&T, State Street Corp. and Bank of New York Mellon.

By contrast, two of the nation's largest banks - Bank of America and Citigroup - said that dividend increases will have to wait. The pair received the largest federal bailouts during the crisis. Two large regional banks, KeyCorp and SunTrust, said they will raise new capital after the Fed review.

The recent stress tests are part of a Fed effort to do a better job of overseeing the financial system. The tests involved teams of economists and finance experts, not just bank supervisors, who traditionally focus on narrow questions of bank solvency.

Ernest Patrikis, a partner at law firm White & Case and a former New York Fed official, said stress tests can give the Fed leeway "to back off from its current micromanagement of the nation's biggest banks."

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