Fed to begin stress tests

The US Federal Reserve will this week begin carrying out new stress tests on 19 big American banks, to see if they are healthy enough to hike their dividends or buy back stock.

The Fed will try to determine how another financial crisis or economic shock would hurt the 19 banks, which include Goldman Sachs, JP Morgan Chase and Bank of America.

Analysts say the stress tests – which will take around three months to complete – are expected to show that the majority of institutions are strong enough to raise their dividends. Banks are likely to be informed of the Fed’s preliminary findings in mid-March.

During the financial crisis, dividends were suspended or dramatically scaled back. Those restrictions have stayed in place, weighing on the value of banking stocks despite surging profits in the wake of the recession.

Investors are now calling for banks to return part of their profits through higher dividends or share buybacks.

Those banks that pass the tests with flying colours are likely to be allowed to raise their dividends to as much as 30 per cent of their post-tax profits. But analysts says banks such as Suntrust Banks and Key Corp, are unlikely to perform well.