Fed may let strong banks hike dividends

By Reuters
Posted Nov. 4, 2010 at 5:11 p.m.

The Federal Reserve is expected soon to allow some healthy banks with strong capital levels to increase dividend payments, according to people familiar with the decision.

The updated guidance from the Fed is likely a few weeks away. The Fed is expected to take a conservative approach in deciding which banks can increase dividends and assess each bank individually, according to a person familiar with the matter.

Banks have been pushing to boost dividends. But regulators have balked at giving them the green light, citing uncertainty about the economic outlook and new capital rules.

With global capital rules and the U.S. financial regulatory system retooling farther down the track, the environment is more conducive to letting strong banks increase dividend payments.

The Fed does not want to prevent banks that are viewed as particularly strong from boosting dividends, a source said.

Banks are better capitalized than they have been for some time, and the largest banks are maintaining their highest capital levels in years, according to analysts.

But uncertainty over how much more capital banks would have to keep on hand to satisfy new domestic and international bank rules had been an obstacle to allowing banks to raise dividends.

That obstacle has been partially cleared after international regulators last month struck a deal on so-called Basel III capital rules.

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