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Questions as Banks Increase Dividends
The New York Times | March 15, 2012 | 11:47 AM EDT

Emboldened by the Federal Reserve’s passing grades on stress tests of banks, some of the nation’s biggest financial firms are racing to dole out billions of dollars in dividends.

But some industry analysts and academics say that it is too soon and that it could threaten to put banks on shaky ground.

Such moves deplete the capital cushions of banks, potentially making them far more vulnerable to withstanding sudden market shocks.

“It’s frankly irresponsible to allow banks to quickly empty their coffers,” said Neil Barofsky, the former inspector general for the Troubled Asset Relief Program. “They should be holding onto this money.”

Another potential problem is that stress tests might overstate the health of banks, Mr. Barofsky said.

On Tuesday, the Federal Reserve concluded that 15 of the 19 banks it examined would be able to maintain a minimum capital level during a severe economic crisis. That cleared the way for those banks to bolster dividend payments to shareholders and initiate a round of share buybacks.

It also set off a debate among economists and banking analysts about whether banks have actually achieved renewed strength.

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