In January, the “stress test” banks (i.e., those 19 institutions stress-tested under the U.S.’s Supervisory Capital Assessment Program in 2009) submitted capital plans to the Federal Reserve, many of which (JPM, WFC, PNC) are expected to have included requests to raise their dividends. For these banks, dividend increases (and buybacks of any size) have been on hold until the Federal Reserve gives its blessing, while some of their smaller (and less systemically important) peers began raising their dividends last fall. It is widely expected that the stress test banks will receive Fed approval of their capital plans in the coming weeks (some believe the week of March 14). This is significant for three reasons.

First, given the extreme conservatism of the U.S. Treasury Department (UST), and its relentless focus on shoring up the system, allowing these large and systemically important banks to raise their dividends would be seen as a sign of confidence by the regulators that the system is sound. It may also be interpreted by investors that the UST and Federal Reserve believe the dramatic recovery in earnings experienced in 2010 is durable.

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Second, the dividends at these very large banks have been near zero since accepting money under the U.S. Treasury’s TARP program at the height of the crisis, and the stress tests, which required capital to be raised by the systemically important banks. Therefore, raising dividends should result in incremental fund flows from yield-oriented investors.

Third, it may also be interpreted by the market as a signal that capital can now be deployed through acquisitions, marking an acceleration in M&A.

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