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Fed issues rules to let banks boost dividends

By Hibah Yousuf, staff reporter

NEW YORK (CNNMoney.com) -- The Federal Reserve issued a new set of guidelines Wednesday that pave the way for healthy banks to begin hiking dividends and repurchasing shares next year.

The Fed said that the 19 banks that completed the Fed's stress tests in May 2009, including Bank of America (BAC, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Goldman Sachs (GS, Fortune 500), will have to submit their capital plans for 2011 early next year and detail the strength of their balance sheets.

The central bank will evaluate the banks' plans using "a number of criteria," with emphasis on the ability to absorb losses over two years, even under "adverse" economic conditions.

The Fed said banks must also repay or replace any government investment in the form of preferred or common stock before raising payouts or buying back shares.

Many of the larger banks have been paying just a penny or a nickel per share dividend each quarter since the financial sector cratered in 2008.

Limiting shareholder payouts has helped the banking giants restore their capital bases over the past two years. But some investors in those banks are eager for higher dividends now that the worst appears to be over for the financial sector.

Federal Reserve Governor Daniel Tarullo called the central bank's approach to handling requests by big bank holding companies "conservative" during in a speech last week, before the guidelines were released.

He said the Fed will move slowly in approving higher dividends in order to maintain stability in the financial system.  To top of page

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