The US Federal Reserve has proposed a set of strict terms and conditions for banks to pay dividends or buy back shares as part of various changes to its annual stress tests to check banks’ ability to sustain financial crisis.

The US financial regulator made it clear that the lenders will have to obtain its prior approval for shareholder payouts every year to ensure that the banks do not collapse after the financial downturn.

In a proposal the Fed weighed that it would cap banks’ ability to distribute dividends until the companies reach the capital level, as per their official capital plan submitted to the central bank.

"The proposed rule would limit a large bank holding company’s ability to make capital distributions to the extent that the bank holding company does not execute planned capital issuances during the capital plan cycle."

"This proposed change would address behavior observed in previous capital plan cycles, when some large bank holding companies included issuances of capital instruments in their capital plans, but did not execute these planned issuances."

The central bank also revised the dates by which banks have to submit their capital plans.

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The biggest banks with more than $50bn of total assets would need to submit their plans and stress test results to the Federal Reserve by 5 April, three months later than under the current rule makings.

A bank holding company with total consolidated assets of more than $10bn and less than $50bn would be required to submit its stress test results to the Federal Reserve by July 31.

Additionally, savings and loan holding companies and state member banks, who are subject to the stress tests under the Dodd-Frank Wall Street Reform and Consumer Protection Act, also would be required to submit their results several months later than under the current rules.

The industry has given time until 11 August to share feedback on the proposed rule which would then come into force in the 2015-2016 stress test cycles.