Fed caps banks’ dividends, orders suspension of share buybacks

The Federal Reserve has put a cap on the amount of dividends banks can pay their shareholders and has ordered them to suspend their stock repurchase programs.

Ken Sweet reported the news for the AP:

A worst-case scenario for the U.S. economy ravaged by the coronavirus pandemic would cause the nation’s 34 largest banks to collectively lose roughly $700 billion, the Federal Reserve said Thursday.

To bolster the banks ahead of such a potentially damaging recession, the Fed ordered them to suspend buybacks of their own stock and to cap dividend payouts until Sept. 30.

The move comes as the central bank unveiled its latest “stress tests,” which are designed to gauge the resiliency of the nation’s largest banks. The annual tests change every year, and the banks must pass them to start buying back shares or paying out dividends.

Greg Robb from MarketWatch wrote:

In a 4-to-1 vote, the Fed will tie the distribution of dividends to a formula based on recent income. The formula sets third-quarter dividends at a level equal to average net income over the past four quarters. Fed Gov. Lael Brainard dissented from the decision.

By that calculation, some banks may have to cut their dividends. A senior Fed official said this could be “binding” for some banks.

In her dissent, Brainard said: “I do not support giving the green light for large banks to deplete capital,” arguing instead for a blanket suspension of dividends.

CNBC’s Hugh Son noted:

The move signals that the unprecedented nature of the coronavirus pandemic, and the difficulty in forecasting 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 firms made billions of dollars in payouts only to have to raise capital later. The biggest U.S. banks already said in March that they would voluntarily suspend share repurchases, which make up roughly 70% of capital payouts for the industry.