Fed expanding capital tests for US banks

WASHINGTON (Reuters) – The Federal Reserve plans to expand the number of banks it will subject to annual tests used to determine if stock dividends can be increased and whether an institution is holding enough capital.

On Friday the Fed said it is proposing that banks with $50 billion or more in assets be subjected to the capital testing regime as well.

In March the Fed completed these tests on 19 of the largest U.S. bank holding companies and under the new plan as many as 35 banks would have to take part in the process, according to the Fed.

The tests seek to determine how a bank would weather a financial shock or an economic downturn.

“Institutions would be expected to have credible plans to have sufficient capital so that they can continue to lend to households and businesses, even under adverse conditions,” the Fed said in a release.

The test have real consequences for banks and their investors.

Following the end of the latest review in March, banks such as JPMorgan Chase & Co and Wells Fargo & Co were able to announce plans to boost their dividends while Bank of America was not.

During the 2007-2009 financial crisis, the government was forced to extend substantial support to banks such as Citigroup Inc and the tests are one of several measures taken by regulators to guard against future bailouts.

The new Dodd-Frank law requires a set of stress tests for banks, some performed by banks and others directly by regulators, to ensure they can survive a steep downturn in financial markets.

The rule is expected to be finalized later this year and the new round of reviews are planned for early 2012.

The proposal will be out for comment through Aug. 5.