UPDATE 1-US lawmakers target big bank dividend increases
* In letter to Bernanke, lawmakers question capital
* Next round of bank stress tests praised by lawmakers (Adds details from letter, background, bylines, CHARLOTTE to dateline)
By Kevin Drawbaugh and Joe Rauch
WASHINGTON/CHARLOTTE, N.C., Feb 15 (Reuters) - Seven U.S. Democratic lawmakers expressed concern on Tuesday that big banks, some of which are still benefiting from government financial support, plan to boost their dividends and reduce capital.
"It seems hard to justify reducing the capital of banks without considering the continued government support that banks with outstanding guarantees enjoy," the lawmakers said in a letter to Federal Reserve Chairman Ben Bernanke.
The lawmakers praised the Fed for organizing a second round of "stress tests" on the capitalization of big banks.
"We are concerned, however, that the result of the new stress tests may be that some of the 19 banks will be permitted to increase dividends or repurchase stocks as early as the second quarter of this year," they said.
The letter, obtained by Reuters, was signed by Brad Miller, Maxine Waters, George Miller and four other House Democrats, most of them members of the House Financial Services Committee, which oversees banks and Wall Street.
U.S. regulators did a first round of stress tests in early 2009 on the adequacy of capital reserves at big banks while the devastating banking crisis of late 2008 and the massive bailouts that followed were still fresh.
Another round of stress tests is being organized by the Fed. Bank of America Corp (BAC.N) Chief Financial Officer Charles Noski said last month that the Fed is splitting tests for the 19 largest U.S. banks into two groups, depending on when the banks want to boost their dividends in 2011.
The largest U.S. banks slashed their dividends at the height of the crisis in fall 2008 after getting billions of dollars in government bailouts.
Investors have been pushing for a return of the quarterly payouts now that many of the largest banks have repaid the aid and are posting consistent profits.
Bank of America, the largest U.S. bank by assets, plans to raise its dividend, now at 1 cent per share, in the second half of 2011, if it receives Fed approval.
In their letter to Bernanke, the lawmakers said some of the nation's largest banks, including Bank of America, JPMorgan Chase (JPM.N), Citigroup (C.N) Morgan Stanley (MS.N) and Goldman Sachs (GS.N) still benefit from the government's Temporary Liquidity Guarantee Program set up in the crisis.
Fed Governor Daniel Tarullo last month said the central bank wants lenders to be careful about raising dividends during the modest economic recovery.
Lower capital at banks that still have TLGP guarantees "may put the FDIC at greater risk," the lawmakers said in the letter, also sent to Treasury Secretary Timothy Geithner.
In addition, banks face uncertainty about possible losses on flawed mortgage-backed securities and on the valuations of some of their assets, they said.
"Again, we applaud your undertaking new stress tests ... It appears doubtful, however, that the stress tests alone can sufficiently resolve the uncertainty facing those banks to justify reducing their capital." (Reporting by Kevin Drawbaugh; Additional reporting by Joe Rauch in Charlotte, North Carolina, editing by Dave Zimmerman)