The US Federal Reserve has capped dividends and banned share buybacks by big American banks as it released an analysis showing COVID-19 could trigger $US700 billion of loan losses and push some lenders close to their capital minimums.
Announcing the results of a trio of exercises on the health of America’s top lenders, the Fed said 33 banks that underwent “stress tests” would be banned from buying back their shares until at least the fourth quarter of this year.
The tests of the strength of the banks’ finances showed lenders faced significant capital losses in an economic slump caused by the coronavirus pandemic.
The news will add to the growing uncertainty on Wall Street.
In its analysis, the Fed found that the country’s 34 largest lenders have struggled to model the impact on their finances of the unprecedented downturn and ensuing rescue programs.
The Fed did not say how each bank fared under the pandemic analysis, but found the 34 tested firms could suffer as much as $US700 billion in aggregate loan losses under the most severe, “W-shaped” economic recovery.
Shares of banks including JPMorgan Chase & Co, Bank of America Corp, Citigroup Inc, Wells Fargo & Co and Goldman Sachs Group slumped in after-hours trading on the news, having risen earlier in the day on a relaxation of a rule controlling their investments.
The Fed conducted a sensitivity analysis to assess the resiliency of large banks under three hypothetical recessions, or downside scenarios, which could result from the coronavirus event. “The scenarios included a V-shaped recession and recovery; a slower, U-shaped recession and recovery; and a W-shaped, double-dip recession.”
“In the three downside scenarios, the unemployment rate peaked at between 15.6% and 19.5%, which is significantly more stringent than any of the Board’s pre-coronavirus stress test scenarios.”
“The scenarios are not predictions or forecasts of the likely path of the economy or financial markets,” the Fed said. The loan losses ranged from a best $US560 billion to the maximum of $US700 billion.
The Fed said it had told all large banks they will be required 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 Board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.”
“During the third quarter, no share repurchases will be permitted. In recent years, share repurchases have represented approximately 70 percent of shareholder payouts from large banks.
“The Board is also capping dividend payments to the amount paid in the second quarter and is further limiting them to an amount based on recent earnings. As a result, a bank cannot increase its dividend and can pay dividends if it has earned sufficient income,” the Fed said.
