Fed Caps Big Banks' Dividends, Halts Share Buybacks in Fourth Quarter -- Update
30 September 2020 - 10:13PM
Dow Jones News
By Andrew Ackerman
WASHINGTON -- The biggest U.S. banks will face restrictions on
dividends and share buybacks for another three months, the Federal
Reserve said Wednesday, citing the need to conserve capital during
the coronavirus-induced downturn.
The Fed said it would maintain prohibitions on share buybacks
and a cap on dividend payments by 33 banks with more than $100
billion in assets until the end of year. The restrictions, imposed
for the third quarter, were due to expire Wednesday.
The action is intended to "ensure that large banks maintain a
high level of capital resilience," the central bank said in a
statement. "The capital positions of large banks have remained
strong during the third quarter while such restrictions were in
place."
In another sign of the uncertainty facing the industry and the
broader economy, the Fed has required big banks to undergo a second
round of so-called stress tests later this year, based on two
coronavirus-related recession scenarios. Results of the tests,
designed to ensure banks can continue to lend in a crisis, will be
announced by the end of the year.
Banks are in a much stronger position now than they were during
the financial crisis of 2008. But an analysis the Fed conducted
this summer found that if the economy takes a long time to recover,
banks could experience losses on a similar scale. It said at the
time that limiting shareholder payouts would help keep banks
healthy during the recession.
The biggest U.S. banks, including Bank of America Corp. and
JPMorgan Chase & Co., had already voluntarily halted share
buybacks through the second quarter. Buybacks are the main way U.S.
banks return capital to shareholders. Under the dividend
restrictions, banks won't be able to make payouts that are greater
than their average quarterly profit from the four most recent
quarters.
The Fed's restrictions come as many bank shares have plunged as
the coronavirus pandemic took a toll on banks' bread-and-butter
lending businesses. Short-term interest rates near zero and tens of
billions of dollars set aside to cover bad loans have cut into
profits, outweighing gains in trading.
Bank executives "are biting their tongues with the Fed, with
fingers crossed they can buy back stock someday soon at these cheap
prices," said Christopher Marinac, director of research for Janney
Montgomery Scott LLC.
The Fed's decision to allow banks to continue paying dividends
drew a dissent from Lael Brainard, the Fed's lone holdover from the
Obama administration, who has said allowing banks to deplete
capital buffers could force them to tighten credit in a protracted
downturn.
Some former U.S. regulators have said the Fed should order the
largest banks to suspend payouts to preserve capital at a time of
soaring unemployment and business disruption that may eclipse the
2008 financial crisis.
"If things work out well, banks can distribute income later on,"
Janet Yellen, a former Fed chairwoman, told The Wall Street Journal
this spring. "If not, they'll have a buffer that will be needed to
support the credit needs of the economy."
The Fed committed earlier this month to support the economic
recovery by setting a higher bar to raise interest rates and by
signaling it expected to hold rates near zero for at least three
more years.
In new projections released after a two-day policy meeting in
mid-September, all 17 officials who participated said they expect
to keep rates near zero at least through next year, and 13
projected rates would stay there through 2023.
Write to Andrew Ackerman at andrew.ackerman@wsj.com
(END) Dow Jones Newswires
September 30, 2020 16:58 ET (20:58 GMT)
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