Banks with more than $50 billion of assets must be "well prepared" to meet new international capital standards when they file capital plans next year, according to a final rule issued by the Federal Reserve Board on Tuesday.
The central bank said it will use the capital plans to conduct a new round of stress testing in 2012 on the 31 largest financial institutions.
"Institutions will be expected to have credible plans that show they have sufficient capital so that they can continue to lend to households and businesses, even under adverse conditions, and are well prepared to meet regulatory capital standards agreed to by the Basel Committee on Banking Supervision as they are implemented in the United States," the Fed said in a press release.
Under the rule, the Fed will conduct annual evaluations of firms' capital adequacy, internal capital adequacy assessment processes, and their plans to make capital distributions. The Fed said it will approve dividend increases only for firms whose capital plans have been approved by supervisors, and that are able to demonstrate sufficient financial strength during stressed market scenarios.
The plans are due Jan. 9.
Fed Gov. Daniel Tarullo hinted such a requirement was in the offing in a recent speech, saying that firms would not be allowed to pay dividends unless they could prove they will be able to meet Basel III capital requirements. Technically, banks do not have to comply with Basel III rules until 2019, but regulators have put firms under pressure to meet them much earlier than that.
The Fed also issued instructions outlining the information it is seeking and the analysis it will do under the new stress testing, which will differ based on a company's size and complexity.
The instructions include a stress test scenario, created by the Fed, that is designed to simulate what would happen if the country were in a deep recession while at the same time economic activity in other countries was also contracting.
The six largest firms will also have to estimate potential losses stemming from a "hypothetical global market shock" similar to the price movements seen during the second half of 2008, according to a press release.