In its latest effort to enhance banking supervision, the Federal Reserve Board issued guidelines for evaluating proposals by large bank holding companies (BHCs) to undertake capital actions in 2011, such as increasing dividend payments or repurchasing or redeeming stock.
The guidelines apply to 19 of the biggest US banks, which were involved in the Fed's stress test last year. The Fed is asking large banks to submit capital plans by 7 January 2011, regardless of whether they plan to raise dividends or buyback stock.
"The criteria provide a common, conservative approach to ensure that BHCs hold adequate capital to maintain ready access to funding, continue operations, and continue to serve as credit intermediaries, even under adverse conditions," says the Federal Reserve in a statement.
The guidelines state that any capital distribution plan will be evaluated on the basis of a number of criteria, with particular emphasis on several points:
• The firm's ability to absorb losses over the next two years under several scenarios, including an adverse macroeconomic scenario specified by the Federal Reserve and adverse scenarios appropriate for a particular firm's business model and portfolios;
• How the firm will meet Basel III capital requirements as they take effect in the United States, in the context of the proposed capital distributions as well as any anticipated impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the firm's business model or capital adequacy; and
• The firm's plans to repay US government investments, if applicable. BHCs are expected to complete the repayment or replacement of any US government investments in the form of either preferred shares or common equity prior to increasing capital payouts through higher dividends or stock buybacks.
The Federal Reserve expects to respond to capital distribution requests beginning in the first quarter.
"As recognised by the Dodd-Frank Act and demonstrated by the Federal Reserve-led Supervisory Capital Assessment Program in 2009, regular, horizontal reviews across groups of firms provide regulators with both firm-specific and industry-wide perspectives of various issues and trends," it says.
The Federal Reserve plans to undertake these capital plan reviews on a regular basis and will consult with primary federal bank regulators.