WASHINGTON - November 17, 2010 - The nation's largest banks must undergo new "stress tests" to show they can weather another recession, and the Federal Reserve said those that pass can boost dividends paid to investors.

Banks would need to show the Fed's bank examiners that they're in good financial health and that they have adequate capital to absorb potential losses over the next two years.

The Fed oversees Wall Street's biggest banks, including Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., and Wells Fargo & Co.

Banks have to file plans with the Fed showing that they would have sufficient capital cushions to cover any losses under different economic scenarios - including if the economy were to fall back into a recession, Fed officials said.

All the 19 largest banks overseen by the Fed must file the plans by January 7, 2011 - even if they don't intend to increase their dividend payments.

The upcoming stress tests are a key part of the Fed's efforts to make sure that banks - and the entire financial system - are stable. The safety and soundness of the banking system are important for the economy's health.

Banks that don't pass the stress tests will have to take steps to raise new capital to build up their cushions.

On Wall Street, banks' stock prices tumbled after the Fed released the guidelines. Bank of America dropped 2.7%. Wells Fargo fell 1.2%, JPMorgan Chase declined 1.1% and Citigroup slid 0.7%.

The Fed's first stress tests were conducted in 2009 as the country was still reeling from the worst Depression and financial crisis since the 1930s. Those results were made public in a move to boost confidence in the then-fragile U.S. banking system. The results of the upcoming exams, however, won't be made public, Fed officials said. That's in line with banking regulators' long tradition of keeping such information confidential.

Banks wanting to boost their dividends also would need to show the Fed they have a plan to comply with stricter global capital requirements recently agreed to in Basel, Switzerland.

Additionally, banks would need to repay the federal government any bailout money received during the financial crisis before they could boost their dividend payments.