(Bloomberg News)  Federal Reserve stress tests on the largest U.S. banks were more stringent than some executives initially expected, forcing them to scale back proposals to restore dividends and repurchase shares, according to people familiar with the process.

Examiners told some lenders to reduce or delay plans for giving shareholders capital, the people said, asking not to be named because the Fed isn't making its findings public. They declined to identify specific institutions.

The central bank is telling lenders today whether capital plans they submitted in January were approved, according to the people. Banks deemed strong enough may then announce capital payouts.

"Whoever increases their dividend first gets the Good Housekeeping Seal of approval from the Fed," said Michael Mayo, an analyst with Credit Agricole Securities USA in New York. "It's implicit. The approval means that things are OK."

Barbara Hagenbaugh, a Fed spokeswoman, declined to comment. The central bank has been poring over submissions from 19 of the largest U.S. banks since January to determine which are strong enough to reward shareholders without endangering their stability, after U.S. taxpayers had to bail out firms during the global financial crisis.

The stress tests measure the capital banks would need through 2012 if unemployment exceeds 11 percent and another recession occurs, two people with knowledge of the review said in February. The Fed sent banks a two-page memo this week restricting them from publicly discussing how they did in the tests, the Wall Street Journal reported today, citing people familiar with the memo.

Moynihan, Dimon

Even if examiners resisted banks' proposals, investors may not be disappointed, because executives at most lenders have helped to set public expectations. Chief executive officers including Brian T. Moynihan, 51, at Charlotte, North Carolina- based Bank of America Corp., and Jamie Dimon, 55, at JPMorgan Chase & Co. in New York have updated investors on their intended payouts during the past three months.

Bank of America's 64-cent quarterly dividend was halved in December 2008 during the financial crisis and then slashed to a cent three months later. It didn't ask the Fed if it could raise the payout in 2011's first half, opting to retain earnings as it seeks to meet higher capital requirements being imposed by the Fed and international regulators under the Basel III agreement, according to a person familiar with the lender's plan.

With the stress tests almost done, Moynihan told investors March 8 that the bank will pay a "modest" dividend in the second half of this year and make "moderate" payments in 2012. Robert Stickler, a company spokesman, said he couldn't comment.

Dividend Cut

Dimon backed off comments from October, when he had said he Dimon backed off comments from October, when he had said he was "reasonably hopeful" the firm, which cut its quarterly dividend to 5 cents in 2009, would be able to raise that payment in this year's first quarter. In January, he told analysts, "now it looks more like the second quarter."

The initial payout may be 75 cents to $1 a share annually, approaching 30 percent of normalized earnings over time, he said then.

Jennifer Zuccarelli, a company spokeswoman, declined to comment.

"Most banks have prepared the market for a slow dividend increase," said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and analyst at FBR Capital Markets in Arlington, Virginia. If the strongest banks begin to announce plans today for deploying capital, "that will say a lot."


Such banks may include JPMorgan and New York-based Goldman Sachs Group Inc., as well as U.S. Bancorp in Minneapolis and Wells Fargo & Co. in San Francisco, according to a March 15 note by Credit Suisse Group AG analysts led by Howard Chen and Moshe Orenbuch in New York.

One hurdle for banks was the Fed's revised capital test. When calculating capital requirements, it may place lower values on certain consumer loans -- such as mortgages, credit-card and auto loans -- than required under U.S. accounting and securities disclosure rules, according to people with knowledge of the process.

Additional resistance came from the Federal Deposit Insurance Corp. It pushed the Fed to require banks to refinance about $267 billion in outstanding debt carrying FDIC guarantees under an emergency financing program at the height of the crisis, when liquidity was scarce and funding costs soared.

Capital Repurchases

In all, 121 institutions used the FDIC's Temporary Liquidity Guarantee Program in 2008 and 2009 to issue unsecured debt at discounted market rates from Oct. 14, 2008 through the end of 2009. The spread in January 2009 between composite three- year TLGP debt to comparable U.S. Treasuries was 88 basis points, or 0.88 of a percentage point, compared with an average 458 basis points for non-guaranteed bank debt, Jason Cave, the FDIC's director for complex financial institutions monitoring, told U.S. lawmakers at a March 4 hearing in Washington.

Cave urged institutions to refinance that paper now to lock in low-cost, long-term funding "while credit conditions remain favorable, rather than waiting to issue new debt as TLGP debt matures later this year or next."

"The regulators should not approve dividend and capital repurchases which involve significant cash outlays by financial firms, until we are all fully confident that these firms will have the financial resources -- under both normal and stressed conditions -- to repay debt guaranteed by the FDIC," Cave said. Andrew Gray, a spokesman for the FDIC, declined to comment.

Citigroup, Morgan Stanley

The Fed exempted FDIC guarantees from its requirement that banks first repay "any outstanding U.S. government investment" before returning capital to shareholders when it issued guidance to the banks in November. Examiners still are requiring banks to prove they can refinance those obligations under both good and stressed markets as part of the Fed's stress test, according to the guidance.

Citigroup Inc., based in New York, has $58 billion in outstanding TLGP debt, followed by JPMorgan with $36 billion, Bank of America with $27 billion, New York-based Morgan Stanley with $21 billion and Goldman Sachs with $19 billion, according to a Feb. 15 letter sent to Fed Chairman Ben S. Bernanke from Representative George Miller, a California Democrat, and six other lawmakers.

Citigroup, the third-largest U.S. bank by assets, canceled its dividend in 2009. In January, CEO Vikram Pandit, 54, said the question of dividends or buybacks "is a 2012 thing."

Like its peers, Bank of America aims to eventually pay a dividend equal to 30 percent of earnings, Moynihan told investors March 8.

"We're being reasonable with our request," he said. "We'll see what they come back with in the next few weeks."