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Federal Reserve allows some banks to boost dividends as it finishes second round of stress tests

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The Federal Reserve will let some of the nation’s 19 largest banks increase or restart dividend payments, freeing them from restrictions in place since early 2009.

The Fed made the announcement Friday after it completed a second round of extensive stress tests on the banks to determine whether they could release some of their capital reserves and still withstand future economic shocks. The Fed said that it would not release which banks passed the tests but that ‘some firms are expected to to increase or restart dividend payments, buy back shares, or repay government capital’ as a result of the latest review.

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Those banks were expected to announce their plans on their own. JP Morgan Chase & Co. and Wells Fargo & Co. both quickly said that they would increase dividends and authorized share repurchases.

With the financial system in deep distress in February 2009, the Fed told the largest bank holding companies that they needed to substantially reduce or eliminate dividends to stabilize their institutions. The Fed then conducted a first round of extensive stress tests on the banks to determine whether they needed to raise more money to be able to withstand a deepening of the recession.

Those results were made public to reassure the markets, and 10 banks -- including Bank of America Corp. and Wells Fargo -- were told to raise a total of $75 billion.

Last fall, the Fed launched another round of tests called the Comprehensive Capital Analysis and Review to look at the capital plans of each of the 19 banks. The announcement that some banks likely would be freed from the 2009 restrictions in part reflects ‘the significant improvement in both economic conditions and the capital positions of financial institutions,’ the Fed said.

‘The return of capital to shareholders under appropriate conditions is a step in the process of improvement in the financial sector and will help to promote banks’ long-term access to capital,’ the Federal Reserve said. ‘Such access will support lending to consumers and businesses.’

If they boost dividends or make other capital distributions, banks still would be expected to ‘remain viable financial intermediaries’ even under ‘stressed’ economic conditions. Banks would have to continue increasing their capital and would be limited to 2011 dividend payments that were no more than 30% of anticipated earnings.

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-- Jim Puzzanghera

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