Bank Dividends Capped, Buybacks Suspended by Federal Reserve

Stress tests show some banks could approach minimum capitalization requirements under lengthy recoveries from coronavirus recession.
Publish date:

Large U.S. banks won’t be able to buy back shares in the third quarter and will have dividends capped because of economic uncertainties caused by the covid-19 pandemic the Federal Reserve said Thursday after the market closed.

The Fed said it conducted analysis to measure the resiliency of large banks under three scenarios: a V-shaped recession and recovery, a slower, U-shaped recession and a W-shaped, or double-dip recession.

“Under the U- and W-shaped scenarios, most firms remain well capitalized but several would approach minimum capital levels,” the Fed said in a statement.

In light of that, the Fed said it 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.” Share buybacks have accounted for about 70% of shareholder payouts from large banks in recent years, according to the statement.

The Fed is also requiring banks “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 Fed conducted the so-called stress test analysis on 34 large banks. It said projected loan losses for the 34 banks “ranged from $560 billion to $700 billion in the sensitivity analysis and aggregate capital ratios declined from 12% in the fourth quarter of 2019 to between 9.5% and 7.7% percent under the hypothetical downside scenarios.”

The Board will conduct additional analysis each quarter to determine if adjustments are needed.

Shares of major U.S. banks fell in after-hours trading.

Wells Fargo & Co.  (WFC) - Get Report shares fell $1.15, or 4% to $26.21. Bank of America  (BAC) - Get Report fell 60 cents, or 2.4%, to $24.12. JPMorgan Chase  (JPM) - Get Report fell 72 cents, or 0.7%, to $97.24. The Goldman Sachs Group, Inc.  (GS) - Get Report, fell 3.57%, to $199.56

The Financial Select Sector SPDR Fund  (XLF) - Get Report fell 31 cents, or 1.3%, to $23.28.