US central bank to relax stranglehold on largest banks

Mar 18, 2011, 16:09 GMT

Washington - The US Federal Reserve on Friday began easing its stranglehold on the country's largest banks by relaxing capital restrictions that were put in place in the aftermath of the 2008 financial crisis.

The US central bank said it had completed a second round of so- called 'stress tests' on 19 major banks, examining their capital levels and strength more than two years after Wall Street was on the brink of collapse. The first such tests were conducted in 2009.

The results allow some banks to take actions that have been largely prevented by the US government since late 2008, including raising or restarting dividend payments to shareholders and buying back shares.

Some banks almost immediately announced plans for share buybacks or dividend increases, including JP Morgan Chase and Wells Fargo.

But the move comes as a government bank regulator, the FDIC, has begun taking to task bank managers for their role in causing the Wall Street turmoil. Three former top executives from Washington Mutual, which was gobbled up by JP Morgan in late 2008 to avoid its collapse, were sued by the FDIC Thursday for pushing risky bank loans.

The financial crisis had prompted the Fed to limit banks' wiggle room to use their capital, in a bid to ensure the firms had enough money to stay afloat and keep lending money to consumers.

The Fed in a statement said there had been a 'significant improvement in both economic conditions and the capital positions of financial institutions' over the past two years. The 19 banks had together increased their common equity by more than 300 billion dollars since the end of 2008.

The Fed also said that US financial reforms and international agreements on raising capital standards had 'substantially clarified the regulatory environment' for the country's banks.

Allowing the financial firms to return some of their capital to shareholders marked 'a step in the process of improvement in the financial sector and will help to promote banks' long-term access to capital.'

Read more about Banking