updated 2/24/2009 6:44:03 PM ET 2009-02-24T23:44:03

The Federal Reserve is letting banks know they need to be careful when they decide to pay dividends to shareholders.

The central bank, which regulates the nation's large bank holding companies, said in a guidance letter on Tuesday that banks need to consult with the Fed if they plan to pay any dividends that could raise "safety and soundness concerns."

The Fed's Division of Banking Supervision and Regulation said the new guidance was intended for all banks it regulates but was particularly aimed at banks "experiencing financial difficulties and/or receiving public funds."

The letter said the bank holding company should inform the Fed if it is planning to pay a dividend that exceeds earnings for a given quarter or that could effect's the bank's capital position in an adverse way.

The new guidance came a day after JPMorgan Chase & Co. announced that it was slashing its quarterly dividend and follows widespread complaints from critics of the government's $700 billion financial rescue program that billions of dollars had been provided to banks with few restrictions on how the money would be used.

Critics have charged that some banks used the capital injections not to boost lending, but to pay dividends to stockholders or reward executives with large bonuses.

The Obama administration earlier this month announced a significant overhaul of the program seeking to address various complaints over how the bailout effort was operated by the Bush administration.

JPMorgan on Monday said it was cutting its quarterly dividend to 5 cents per share from 38 cents in a bid to preserve capital. Jamie Dimon, chief executive of the banking giant, said the move was a precaution aimed at ensuring JPMorgan has financial flexibility should economic conditions worsen.

The move was expected to save the company about $5 billion per year. JPMorgan has received $25 billion in capital injections from the government's rescue fund, the same amount as its San Francisco-based rival Wells Fargo & Co.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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