The Federal Reserve decided on Thursday to oblige large banks to raise capital by suspending share buybacks and dividend payments in the third quarter.
In a 4-to-1 vote, the Fed will tie dividend payments to a formula based on recent earnings. The formula sets third-quarter dividends at a level that corresponds to the average net profit for the past four quarters. Fed Governor Lael Brainard disagreed with the decision.
According to this calculation, some banks may have to cut their dividends. A senior Fed official said this could be “binding” on some banks.
In her opposition, Brainard said: “I do not support giving large banks the green light to withdraw capital,”
A senior Fed official said the Fed would progress quarterly. The impact of the pandemic could reduce banks’ net income. The stress tests cover 34 banks, including five foreign companies.
In a statement, the Financial Services Forum, a trading group of the eight largest banks, said they “understand the Fed’s decision on return on investment by the third quarter.” The banks asked the Fed to be transparent to future banks.
The Fed published two studies – a traditional stress test conducted in February before the pandemic and an analysis of bank capital in three ways, about V-shaped, about how the economy could develop in the coming quarters amid the public health crisis, U-shaped and W. -shaped scenarios.
The traditional stress test has shown that all large banks remain well capitalized.
Under the worst COVID-19 scenarios, “many” banks would operate within their stress capital buffers and a quarter of the banks would approach minimum capital standards, Brainard said.
“Past experience shows that banks that work close to their minimum regulatory requirements are much less likely to meet the needs of creditworthy borrowers, and the resulting tightening of credit conditions could affect the recovery,” she added.
The Fed said banks would be required to rethink their capital needs and resubmit the capital plans later this year.
The stress test included a day with several measures from the Fed and other regulators.
First, the Fed voted, Financial Deposit Insurance Corp. and the Office of the Currency Auditor, the Securities and Exchange Commission and the Commodity Futures Trading Commission for completing the changes to the Volcker Rule, which limits banking for their own portfolio.
The Fed, FDIC, OCC, Federal House Finance Agency and Farm Credit Administration voted to eliminate margin requirements for inter-affiliate banks.
Gregg Gelzinis, senior policy analyst for economic policy at the Center for American Progress, criticized the changes to the Volcker rule and said it allowed investments in high-risk fund vehicles.
The removal of margin requirements reduces the ability of banks to offset losses if one of their affiliates cannot meet its swap obligations.
“Both final rules reject important lessons from the last financial crisis and put workers and families at greater risk,” said Gelzinis.