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) -- Most of the 19 large bank holding companies that will submit their capital plans to the

Federal Reserve

in early 2011 appear set to gain approval to begin returning capital to investors by increasing their dividends or buying back shares.

The regulator made clear that banks still owing the government bailout money received through the U.S. Treasury Department's Troubled Assets Relief Program, or TARP, would have to fully repay the government before offering dividend payouts.

The Fed will also expect the holding companies to "demonstrate with great assurance that they could achieve the ratios required by the

Basel III

framework." While U.S. regulators are still in the process of adopting Basel III, third-quarter capital ratios can provide a hint of which holding companies are best-positioned right now to comply.

According to data from SNL Financial, members of the group of 19 holding companies that are no longer participating in TARP and will overcome the initial hurdle include

Bank of America



JPMorgan Chase






Wells Fargo



U.S. Bancorp



PNC Financial Services



Bank of New York Mellon



Capital One Financial



BB&T Corp.



State Street



American Express



Goldman Sachs






Out of this group, all had Tier 1 risk-based common equity ratios of at least 7.56% (for USB), ranging as high as 13.90% for State Street. Additionally, these banks were all profitable during the third quarter, except for Bank of America, which posted a net loss of $7.3 billion, or 77 cents a share, although that resulted from a non-cash goodwill impairment charge of $10.4 billion, applicable to its Global Card Services segment.

Morgan Stanley


reported an even higher ratio of Tier 1 common equity to risk-weighted assets of 16.5% as of September 30.

Other members of the group of 19, such as

Ally Financial

(formerly GMAC and no longer publicly traded),

Regions Financial



Fifth Third Bancorp








, are still participating in TARP and would not be able to offer a dividend under current circumstances.

In a letter to member banks and holding companies under its supervision, the Federal Reserve reminded the industry that it would continue its active monitoring of banks' capital levels and risks to capital, and said bank holding companies "should eliminate, defer, or significantly reduce" dividend payouts if net income over the previous four quarters is insufficient to "fully fund the dividends."

The Fed also said a holding company should cut or eliminate dividends if its "prospective rate of earnings retention" is not consistent with its "overall current and prospective financial condition," or if the company is in danger of slipping below its minimum capital ratio requirements.

The Fed also reminded banks that "voting common stockholders' equity" is the "most desirable capital element from a supervisory standpoint," and that "banking organizations should avoid overreliance on non-common-equity capital."

The regulator's language left some wiggle room regarding whether or not companies repaying TARP would be required to raise capital, since they referred to the "repayment or replacement of any outstanding U.S. Government investment."

The capital proposals to be submitted to the Fed will be expected to cover a 24-month period, identifing capital needs and taking loan loss expectations into account according to baseline and adverse scenarios expected by the companies, as well as "an adverse macroeconomic scenario" that will be defined by the Fed. The plans will also be expected to detail capital dividend payouts and share buybacks and expected capital ratios, quarter-by-quarter, under the two scenarios.

Basel III will increase required ratios of Tier 1 common equity to risk-weighted assets from 2% to 3.5% in January 2013, then to 4% in 2014 and 4.5% in 2015, with an extra "capital conservation buffer" being phased from 2016 to 2019, which will bring the required Tier 1 common risk-based equity ratio up to 7% for the largest banks.

Even the remaining TARP participants among the "group of 19" major U.S. holding companies already met this standard as of September 30, except for Ally Financial, which had a Tier 1 common risk-based equity ratio of 5.34% according to SNL Financial.

The big unknown is obviously the Federal Reserve's "adverse macroeconomic scenario" that has yet to be announced. It's a fairly safe bet that with the economy coming out of recession and the bank's making money, the Fed will avoid coming up with a scenario forcing any of non-participants in TARP to raise additional common equity. Since the non-participants in TARP are also clearly prepared years in advance for Basel II, the Fed's actions should actually facilitate

dividend increases in the first quarter.

The Fed also "encouraged" the 19 large holding companies that were subject to the Treasury Department's stress tests in May 2009 "have their capital plans filed by January 7, 2011, irrespective of whether they intend to undertake any capital distributions."


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Written by Philip van Doorn in Jupiter, Fla.

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Philip van Doorn


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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.