MNI POLICY: Ex-Regulators Say Fed Bank Curbs Too Weak

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - The Federal Reserve's decision to cap bank dividend

payments in the third quarter is too meek to ensure major financial institutions

have enough capital to withstand a possible crisis related to the pandemic and

global economic slump, former top bank regulators told MNI. 

     Some even fear capital depletion at banks could force another round of

2008-style bank bailouts.

     "The dividend cap means that the banks can still pay dividends, as long as

the amount doesn't exceed the amount they paid last quarter," Sarah Raskin, a

former Fed governor and ex-assistant secretary of the U.S. Treasury under

President Barack Obama, said in an interview.

     "'Pay what you have been paying' is unhinged from any notion of whether or

not the bank can continue to afford to be paying what it has been paying,"

Raskin said.

     The Fed's board of governors on Thursday announced it would require large

banks to stop buying back their own stock and put caps on dividend payments as

it called on them to "preserve capital" for as much as USD700 billion in losses

as the pandemic and recession take a toll.

     The move fell short of calls by current and former bank regulators

including Fed Governor Lael Brainard, who strongly dissented against Thursday's

capital distribution policy in favor of going a step further and halting

dividends to shareholders altogether.

     --BUYING TIME

     "The stock buyback restriction is unlikely to mean much given that the

banks subject to the stress tests had already voluntarily decided to stop doing

stock buybacks," Raskin said. 

     The Fed's stress test Thursday said loan losses for the 34 banks ranged

from USD560 billion to USD700 billion in its "sensitivity analysis." Aggregate

capital ratios fell to 9.5% and 7.7% under two hypothetical scenarios from 12.0%

in the fourth quarter.

     "The restrictions on dividends are really not very tight," said Mark Carey,

a former Fed staffer focused on financial risk who is now president of the

Global Association of Risk Professionals. 

     "It's a cap that mostly buys time to see what happens to bank earnings

after the economy sudden-stop."

     He added, though, that for now "the overall news from the test is good,

with no evidence of widespread capital shortfalls even in the worst virus

scenarios."

     Simon Johnson, former IMF chief economist and MIT Sloan professor, called

the stress test results and aftermath "another sweetheart deal for the banks."

     "The crisis came and they didn't have enough capital," he said.

--MNI Washington Bureau; +1 202 371 2121; email: pedro.dacosta@marketnews.com

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