MNI POLICY: Fed Halts Big Bank Buybacks, Caps Q3 Dividends

By Pedro Nicolaci da Costa

     WASHINGTON (MNI) - The Federal Reserve said Thursday it would require large

banks to stop buying back their own stock and cap dividend payments in the third

quarter as it called on them to "preserve capital" for as much as $700 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.

     "For the third quarter of this year, the Board is requiring large banks to

preserve capital by suspending share repurchases, capping dividend payments, and

allowing dividends according to a formula based on recent income," the central

bank said in a statement following the stress tests of 34 of the country's

largest banks. It said it would revisit the policy on a quarterly basis. 

     The Fed is also requiring banks to re-evaluate their longer-term capital

plans. "All large banks will be required to resubmit and update their capital

plans later this year to reflect current stresses, which will help firms

re-assess their capital needs and maintain strong capital planning practices

during this period of uncertainty."

     The global coronavirus pandemic led to long and draconian economic

shutdowns that have plunged the U.S. economy and others into recession, raising

fears of another financial crisis.

     The Fed acted swiftly starting in March to prevent such an outcome,

slashing interest rates again to zero and launching an array of emergency

lending facilities to soothe credit markets in a time of strain.

     For now, the measures have stabilized Wall Street, but fears remain that

rolling bankruptcies and sky-high unemployment will lead to growing credit

stresses on bank balance sheets.

     --CAPITAL LEVELS FALL

     The Fed's stress test, which did not change its assumptions based on the

pandemic but did make some broad adjustments to account for the latest

developments, said "loan losses for the 34 banks ranged from $560 billion to

$700 billion in the sensitivity analysis.

     Aggregate capital ratios fell to 9.5% and 7.7% under two hypothetical

scenarios, from 12.0% in the fourth quarter.

     "Under the U- and W-shaped scenarios, most firms remain well capitalized

but several would approach minimum capital levels," the Fed said.

     "The banking system has been a source of strength during this crisis and

the results of our sensitivity analyses show that our banks can remain strong in

the face of even the harshest shocks," Fed Vice Chair Randall Quarles said in a

statement.

     --GOVERNOR BRAINARD DISSENTS

     Brainard strongly disagreed, stating separately that "this action creates a

significant risk that banks will need to raise capital or curtail credit at a

challenging time."

     She added that "Using backward-looking earnings as the basis for payouts in

a forward-looking capital framework is problematic at a time when future

earnings are likely to decline and required buffers are likely to rise."

     Senior Fed officials defended the strength of the stress tests by noting

they did not account for the boost from a large fiscal stimulus.

     "Government support to borrowers, including unemployment insurance and the

Paycheck Protection Program may mitigate borrower stress and thereby result in

lower losses in certain portfolios," the report said.

     The most at risk institutions in terms of potential loan losses under a

severe stress scenario were Discover, Capital One, Barclays US and American

Express, potentially signaling concerns about consumer credit.

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

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