A pedestrian passes in front of the New York Stock Exchange (NYSE) in New York, USA, on Wednesday June 3, 2020.
Michael Nagle | Bloomberg | fake pictures
The Federal Reserve on Thursday imposed new restrictions on the US banking industry after its annual stress test found that several banks could be uncomfortably close to minimum capital levels in scenarios linked to the coronavirus pandemic.
The Fed said in a statement that big banks will have to suspend share buybacks and limit dividend payments to their current level for the third quarter of this year. The regulator also said it would only allow dividends to be paid according to a formula tied to a bank’s recent earnings.
Additionally, the industry will be subject to continued scrutiny: For the first time in the history of a decade’s stress test, banks will have to resubmit their payment plans again later this year. They may have to keep doing it every quarter, the regulator said.
“While I hope that banks will continue to manage their capital and liquidity risk stocks wisely, and in support of the real economy, there is material uncertainty about the trajectory of the economic recovery,” said Fed Vice President Randall Quarles. , it’s a statement. “As a result, the Board is taking steps to assess bank conditions more intensively and require larger banks to take prudent steps to preserve capital in the coming months.”
The move indicates that the unprecedented nature of the coronavirus pandemic and the difficulty of predicting what the future holds for banks is making the Fed cautious. Regulators and the industry are keen to avoid the mistakes of the previous crisis, where companies continued to allow billions of dollars in payments and then had to raise capital. The largest US banks already said in March that they would voluntarily suspend the buyback of shares, which account for about 70% of capital payments to the industry.
What was left was dividends, which bank analysts have mostly assumed would remain at their current levels, with the exception of Wells Fargo, which is struggling to restore profits after its fake account scandal. Still, options market traders have bet that banks would be forced to cut dividends, even at JPMorgan Chase, the largest and most profitable megabank.
Banks are expected to disclose their capital plans and whether they actually maintain their current dividend payments on Monday, June 29.
In addition to the typical Federal Reserve test, which examines how lenders fare during a severe economic downturn, the regulator looked at three scenarios linked to the current pandemic: a V-shaped recession and recovery, a U-shaped outlook slower and a W-shaped scenario that would include a double-dip recession.
Given that the real economic consequences of the pandemic already exceed the severe economic slowdown typical of previous reviews, it is these three scenarios that generate the most interest from bank investors.
While the Fed was careful to say that the scenarios were not predictions of what will actually happen, they are very close to what bank executives have said could be the course of the economy: unemployment would peak at as high as 19.5% .
That could cause up to $ 700 billion in credit losses for the 34 banks on the test, and the industry’s aggregate capital ratios could drop from 12% in late 2019 to between 9.5% and 7.7% .
While most of the industry would remain well capitalized, in the tougher U and W scenarios, several banks “would approach minimum capital levels,” the Fed said. However, the Fed did not disclose which banks they would skate near their lows.
This story is unfolding. Please check for updates.
.
