By Andrew Ackerman and Nick Timiraos 

U.S. banks will likely be allowed to keep paying dividends to shareholders, according to people familiar with the matter, even as the coronavirus pandemic threatens to create a mountain of bad loans that could eventually weaken the lenders.

Some former U.S. regulators have said the Federal Reserve 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," said Janet Yellen, a former Fed chairwoman. "If not, they'll have a buffer that will be needed to support the credit needs of the economy."

The European Central Bank and the Bank of England over the past week pressured banks to stop using their capital to make dividend payments to shareholders, raising questions about whether the Fed would follow suit in the U.S.

But Fed officials are unlikely to do so, at least in the short term. They see key differences in how lenders distribute capital on the two continents, and they plan to conduct a more deliberate analysis of the U.S. banking system's health, the people said.

Cleveland Fed President Loretta Mester said she prefers to await the results of the next set of the banks' "stress tests" in June before deciding whether to limit dividend payments. The tests are used to assess banks' ability to continue lending in a crisis.

"Our stress test can give us insight into where capital should be needed, " said Ms. Mester in an interview Thursday. "My preference would be to wait for the stress tests, but different people can have different opinions about that."

In addition, dividends comprise a much smaller slice of the capital distributions made by U.S. banks -- roughly 25% -- compared with 75% in Europe.

And because dividends are paid quarterly in the U.S. instead of annually as in Europe, the Fed have the ability to reassess the situation in the coming weeks and months.

Ordering banks to suspend dividend payments would be tantamount to "kicking them in the shins" at a time when the government is relying on them to continue lending through the downturn, said Christopher Marinac, director of research for Janney Montgomery Scott LLC.

"It's telling the banks they did something wrong when in fact they did a lot right by building capital and strong earnings," Mr. Marinac said. "If we learn later that bank earnings and bank capital is not as strong as we thought, that's a different matter."

Mr. Marinac estimates that large- and medium-size banks will distribute about $54 billion in dividends for all of 2020, or roughly $13.5 billion per quarter.

(More to Come)

Write to Andrew Ackerman at andrew.ackerman@wsj.com and Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

April 03, 2020 16:02 ET (20:02 GMT)