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TheStreet Open House

Bank Dividends Tied to Stress Tests

WASHINGTON ( TheStreet) -- The Federal Reserve said Wednesday that will require banks to provide detailed stress tests and capital plans before they move ahead with dividend restoration.

The decision comes after months of investors anxiously awaiting dividend hikes -- and just after a Congressional Oversight Panel and witnesses at a hearing on Tuesday urged regulators to stress tests the banks once again.

In guidelines issued for capital use in 2011, the Fed said banks must provide "a comprehensive capital plan" by Jan. 7. The plan must incorporates a stress test to consider a range of economic, market and operational conditions, including severe scnarios, to estimate potential capital needs.

"It should capture, among other elements, management's estimates of potential losses, revenues and the amount of capital needed to withstand these scenarios and be able to continue to operate in a safe and sound financial condition," said the Fed.

Banks that will be required to undergo another review of capital adequacy are the same 19 that faced stress tests in the spring of 2009: Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS), U.S. Bancorp (USB), Bank of New York Mellon (BK), State Street (STT), Ally Financial (then known as GMAC), Capital One (COF), PNC (PNC), American Express (AXP), KeyCorp (KEY), Fifth Third (FITB), SunTrust (STI), BB&T (BBT), Regions (RF) and MetLife (MET).

Confidence returned to the market after the Fed released the results of its own stress test in May of last year. The results showed those banks needed to raise another $74.6 billion in capital to prepare for a worst-case scenario -- far less than investors had feared.

In recent weeks, several of the country's largest mortgage servicers have faced intense scrutiny over their mortgage practices - from origination to foreclosure. Investigations and lawsuits related to origination, securitization and foreclosure practices have led to speculative estimates of potential damage.

>>>Read More: Foreclosure Crisis: JPMorgan Admits 'Mistakes'

Numbers related to Bank of America particularly spooked risk-averse investors, sending its stock down sharply over a two-week period. The bank itself outlined buyback-loss exposure in a range of $4 billion to $375 billion within a matter of days.

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