CORRECT: Fed Completes Stress Tests Of 19 Largest US Banks

The U.S. Federal Reserve said Friday it completed a new round of tests on the financial health of the 19 largest U.S. banks, clearing the way for some to immediately boost dividends to shareholders.

The central bank did not disclose the results of the stress tests and did not say which institutions were granted permission to hike their dividends. The Fed said it would discuss the tests with banks on Friday and would present them with a more detailed review next month.

The move came after "significant improvement in both economic conditions and the capital positions of financial institutions," the central bank said.

Analysts expect J.P. Morgan Chase & Co. (JPM) Wells Fargo & Co. (WFC) and US Bancorp (USB) to soon announce modest dividend increases. Citigroup Inc. (C) has already said it won't reinstall its dividend until next year. Bank of America Corp. (BAC) has said it requested the Fed allow a "modest" increase in its dividend, but wasn't looking to boost the payment until the second half of this year.

"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 Fed said in a statement. "Such access will support lending to consumers and businesses."

The Fed tested how banks would weather a worst-case economic scenario where the inflation-adjusted gross domestic product, the total value of goods and services produced in the economy, contracts 1.5% this year. In addition, the Fed test envisioned the unemployment rate would climb to 11% this year from the current level of 8.9% and an index of U.S home prices would fall by 6.2%.

The Fed said banks are expected to limit their dividend payments to 30% of their anticipated earnings for 2011. Any plans to buy back shares or boost dividends will be reviewed by the Fed if a bank's financial picture declines. If the economy takes an unexpected turn for the worse, the Fed may force banks to change their plans.

Not all 19 banks asked to boost their dividends, the Fed said. It is unclear if the Fed objected to some banks' plans to raise the dividend. It may have rejected banks dividend or share buybacks plans because officials concluded the payment would weaken the firm's ability to weather poor economic conditions, or because Fed supervisors believed the banks had inadequate capital plans.

In February 2009, the Fed mandated that banks cut or eliminate their dividends to shore up their financial position as the U.S. economy reeled from the financial crisis of fall 2008. They were barred from restoring those payments without the central bank's permission.

The Fed has now conducted two rounds of special stress tests to those banks, which have been deemed crucial to the health of the financial system. The first round, in spring 2009, acted as a public confidence-boosting exercise and allowed banks to repay money they received from the Treasury Department's Troubled Asset Relief Program.

Three big regional banks, KeyCorp (KEY), SunTrust Banks Inc. (STI), Regions Financial Inc. (RF), still haven't repaid their TARP funds, which they likely must do before boosting dividends.

-By Alan Zibel, Dow Jones Newswires; 202-862-9263; alan.zibel@dowjones.com

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