Sunday, November 14, 2010

Dividend Tap Set to Open

NOVEMBER 13, 2010
Fed to Issue 'Conservative' Guidelines for Banks Soon
By LUCA DI LEO,  Wall Street Journal

Federal Reserve governor Daniel Tarullo said the U.S. central bank would soon issue "conservative" guidelines on how banks will be able to change their dividend policy, marking the first time since the financial crisis the Fed might allow banks to increase their dividends.
Bloomberg News
Fed governor Daniel Tarullo said 'convincing capital plans' are a must.
Big U.S. banks will need to show they meet high capital hurdles to restore or increase dividends they slashed during the crisis, Mr. Tarullo said in a speech Friday at a George Washington University Law School conference.
The first batch of approvals is expected during the first quarter next year. Before the crisis, banks would inform the Fed about their dividend policy, but didn't need explicit approval to raise dividends.
"We will expect firms to submit convincing capital plans that demonstrate their ability to absorb losses over the next two years under an adverse economic scenario that we will specify, and still remain amply capitalized," Mr. Tarullo said.
To lure investors and after posting strong profits recently, many U.S. banks have been itching to boost payments to shareholders. But their ability to increase dividends has essentially been frozen as regulators scrutinized their use of capital in the wake of the crisis.
Wells Fargo & Co. shrank its quarterly payout by 85% last year. Citigroup Inc. hasn't paid a quarterly dividend since February 2009. Regulators allowed J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and some other financial firms to buy back their own stock recently, suggesting federal officials were softening their resistance to dividend increases.
Dividend payments are especially important for banks now that the financial industry's outlook is clouded by the sluggish economy, toughened regulation and looming capital requirements.
Mr. Tarullo said U.S. banks also must have a sound estimate of any significant risks that may not be captured by the Fed when it tests their ability to pay dividends, including potential costs from investors demanding their money back from soured mortgage investment. Mr. Tarullo said U.S. banks also must show they can meet new global capital rules and the requirements of the Dodd-Frank regulatory overhaul.
Leaders from the Group of 20 leading economies Friday approved rules to limit risk at the world's largest banks by requiring companies to hold capital reserves that are at least double what was needed in the past.
Big global banks like Bank of America Corp. and HSBC Holdings PLC will have to hold capital levels equivalent to 7% of their assets. Governments also have made it harder for banks to find loopholes around the rules by moving assets off their balance sheets.
Write to Luca Di Leo at luca.dileo@dowjones.com