While the US Federal Reserve has maintained limits on capital management moves by major banks for the first quarter of 2021 it has given them more latitude to pay higher dividends or make buybacks in the first three months of 2021.
In September the Fed maintained bans started in April on share buybacks and a cap on dividend payments by 33 banks with more than $US100 billion in assets. That ban was to remain in place in the 4th quarter when it would be reviewed for the March quarter of 2021.
On Friday the Fed updated the restrictions for the March quarter saying, “In light of the ongoing economic uncertainty and to preserve the strength of the banking sector, the Board is extending the current restrictions on distributions, with modifications.”
The fed’s action was similar to that from Australia’s main bank regulator, APRA last week which eased its restrictions on Australian bank dividends for the December 31 and March 31 halves.
The Fed ruled that banks will only be able to pay dividends or do buybacks “limited to an amount based on income over the past year.”
“If a firm does not earn income, it will not be able to pay a dividend or make repurchases.,” the Fed said.
“Additionally, the firms’ capital requirements will not be reset at this time. With the current capital requirements and distribution restrictions in place, banks have built capital over the past year.
“The modified restriction will continue to preserve capital and ensure that large banks can still lend to households and businesses,” the Fed said in Friday’s statement.
Friday’s statement also revealed the results of the Fed’s second major stress test of big banks in 2020. The central bank said the tests showed that large banks had strong capital levels.
The first round of tests was done on the 33 biggest banks earlier in the year. The resurgence of the COVID pandemic in the past three months saw the Fed look again at the soundness of bank capital levels and operations.
This second round of tests focused specifically on the banks’ ability to withstand severe downturns stemming from the pandemic, which has had devastating economic consequences across the world.
Minutes after the regulator’s announcement on Friday, two big banks revealed plans to payout to shareholders in 2021.
JPMorgan Chase, America’s biggest bank said it would buy back $US30 billion of its shares during the first three months of 2021.
Citi said it would continue paying its quarterly dividend of 51 US cents a share dividend and would resume share buybacks.
Lael Brainard, a Fed governor, dissented from the decision and later said in a separate statement:
“For several large banks, projected losses take capital levels very close to the minimum requirement, in the range where banks tend to pull back from lending, even before payouts,” she said on Friday.
“Today’s action nearly doubles the amount of capital permitted to be paid out relative to last quarter. Prudence would call for more modest payouts to preserve lending to households and borrowers during an exceptionally challenging winter.”
The banks involved in the tests: Ally Financial, American Express, Bank of America, Bank of New York Mellon, Barclays, BMO Financial, BNP Paribas USA, Capital One, Citigroup, Citizens Financial, Credit Suisse, Deutsche Bank USA, Discover Financial, Fifth Third, Goldman Sachs, HSBC North America, Huntington Bancshares, JPMorgan Chase, KeyCorp, M&T Bank, Morgan Stanley, MUFG Americas, Northern Trust, PNC Financial, Regions Financial, Royal Bank of Canada US, Santander USA, State Street, TD Group US, Trust Financial, UBS Americas, U.S. Bancorp, and Wells Fargo.
