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) -- Bank dividend guidance is getting closer, however institutions will have to meet strict standards in order to raise their dividends, including undergoing a stress test proving they would have sufficient capital for the next two years, one Fed governor says.

According to prepared speech remarks by Federal Reserve Governor Daniel Tarullo, the Fed's "approach to considering such requests will be a conservative one,"


cited him as saying in the speech.

Tarullo is expected to make a presentation at the George Washington University's law school on Friday, according to



"We will expect firms to submit convincing capital plans that demonstrate their ability to absorb losses over the next two years under an adverse economic scenario that we will specify, and still remain adequately capitalized," Tarullo is expected to say, according to



The guidance will be in effect for the first quarter of 2011, Tarullo said.

Fed officials in 2009 strongly encouraged banks to reduce their dividends over concerns about capital preservation in light of the soured loans and other toxic assets clogging up banks' balance sheets.

Industry observers say that large banks including

JPMorgan Chase

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U.S. Bancorp



Wells Fargo



PNC Financial Services


are best positioned to raise their dividends once guidance is clear.

Two other large banks,

Bank of America





, are likely to wait on dividend raises. Citi CEO Vikram Pandit has said that

returning capital to shareholders

is likely a 2012 event.

Banks must also have a "sound estimate" of significant risks that may not be included in the stress testing, such as losses from mortgage putbacks, as well as the ability to conform to Basel III guidelines, he also said, according to



--Written by Laurie Kulikowski in New York.

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Laurie Kulikowski


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