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Fed Seeks Capital Plans as Banks Want to Raise Payouts

The Federal Reserve issued guidelines on how it will decide whether large U.S. banks may increase dividends and buy back shares, requiring the lenders to submit to stress tests of capital levels.

Lenders must maintain a Tier 1 common equity ratio of 5 percent after any distributions, in addition to showing they can absorb losses if the economy sours and how they will meet Basel III capital rules, the Fed said in documents released yesterday. Companies must repay or replace any government investment with preferred or common stock before raising payouts, it said.