Fed caps big bank dividends, heels share buyback in fourth quarter

WASHINGTON – The largest US banks faced restrictions on dividends and would share buybacks for the next three months, citing the need to conserve capital during a coronovirus-induced recession.

The Fed said it would maintain a ban on share buybacks and caps on dividend payments by 33 banks with more than $ 100 billion in assets by the end of the year. The sanctions imposed for the third quarter were to end on Wednesday.

The central bank said in a statement that the purpose of the action is to “ensure that large banks maintain high-level capital flexibility.” “Capital position of large banks remains strong during the third quarter, while such restrictions were in force.”

In another sign of uncertainty facing the industry and the broader economy, the Fed has required large banks to undergo a second round of so-called stress tests later this year based on two coronavirus-related recessionary scenarios. The results of the tests, designed to ensure that banks can lend in distress, will be announced by the end of the year.

Banks were now in a much stronger position during the 2008 financial crisis. But the Fed did an analysis this summer that if the economy takes a long time to recover, banks may experience losses on a similar scale. It was said at the time that limiting shareholder payments would help keep banks healthy during a recession.

Largest US banks including Bank of America Corp.

And JPMorgan Chase & Co., had already voluntarily halted share buybacks through the second quarter. Buybacks are the main ways that American banks return capital to shareholders. Under dividend restrictions, banks will not be able to make payments that exceed their average quarterly profit from the four most recent quarters.

Many bank stocks have fallen as the Fed sanctions as the coronavirus virus epidemic took a toll on the banks’ bread-and-butter lending businesses. A short-term interest rate near zero and tens of billions of dollars to cover bad debts has cut profits, which makes the gains in business.

Jenny Montgomery Scott LLC director of research, Christopher Marinac, said bank officials “are biting their tongues with the Fed, fingers crossed that someday they can soon buy at cheaper prices.”

The Fed’s decision to allow banks to continue paying dividends attracted a resentment from the Obama administration to Fed loan holder, Lyle Brainard, who has said that banks have been allowed to exempt capital capitalists, which allows them Can force debt to tighten in a recession.

Some former US regulators have said that the Fed should order the largest banks to withhold payments to preserve capital due to unemployment and business disruption.

Former Fed chairman Janet Yellen said, “If things work well, banks can distribute the income later” “If not, they will have a buffer that is necessary to support the credit needs of the economy Will happen.”

The Fed committed earlier this month to support the economic recovery by setting a higher bar for raising interest rates, and hoping to keep rates near zero for at least three more years .

In the new projections released after a two-day policy meeting in mid-September, all 17 officials who attended said they expect rates to be at least near zero next year, and 13 projected rates to remain until 2023 .

Write Andrew Ackerman at [email protected]

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