Fed tells banks to test capital position for likely recession

WASHINGTON/NEW YORK: The Federal Reserve ordered the 19 largest US banks to test their capital levels against a scenario of renewed recession with unemployment rising above 11%, said two people with knowledge of the review.

The banks stress-tested the performance of their loans, securities, earnings and capital against at least three possible economic outcomes as part of a broader capital-planning exercise. The banks, including some seeking to increase dividends cut during the financial crisis, submitted their plans last month. The Fed will finish its review in March.

"They're essentially saying, 'Be fore you start returning capital to shareholders, let's make sure banks' capital bases are strong enough to withstand a double-dip scenario,'" said Jonathan Hatcher, a credit strategist specialising in banks at New York-based Jefferies Group. Regulators don't want to see banks "come crawling back for help later," he said.

Executives at banks such as JPMorgan Chase & Coin New York and PNC Financial Services Group in Pittsburgh have asked regulators for permission to increase dividends. The Fed has told banks that it expects dividends and share buybacks to be "conservative" and allow for "significant accretion of capital," according to a November notice. Some capital payout plans may be rejected as "inappropriate", the notice said.

The Fed also wants banks to consider how the Dodd-Frank Act overhauling financial oversight might affect earnings, and how they will meet stricter international capital guidelines, according to the November notice. Banks will also have to consider how many faulty mortgages investors may ask them to take back into their portfolios.