What Does the Fed See Heading at Big Banks? Blocks Share-Buybacks, Slaps on Dividend Caps Due to “Economic Uncertainty” and “Cushion Against Loan Losses”
My Big-Four Bank Index already got crushed back to 2004 level.
After the stock market closed today, the Federal Reserve announced that “in light of the economic uncertainty,” and to provide “a cushion against loan losses,” and to support lending, it would extend for another quarter, so through December 31, the blanket prohibition on share buybacks by large banks (banks with over $100 billion in assets). For the same reasons, it would also cap dividend payments tied to a formula based on recent income.
The Fed said that according to a stress test and additional analysis, whose results were released in June, “all large banks were sufficiently capitalized” to deal with the fallout from the Pandemic.
But it appears that the Fed now thinks the banks need to be even more sufficiently capitalized, so to speak, to deal with whatever may be coming at them. And the Fed will conduct another stress test later this year.
Many banks had voluntarily halted share buybacks in March as all heck was breaking loose. In June, following the release of the stress test results, the Fed imposed the buyback prohibition for the third quarter, now extended through the fourth quarter.
So, let’s put it this way: As far as the Fed is concerned, this crisis is not a blip, and banks need to be prepared for what’s coming at them. The large banks have already set aside billions of dollars each to deal with the fallout on their loan books. But apparently, the Fed thinks there’s more to come.
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