Federal Reserve Places New Restrictions On Banks, Freezing Stock Buybacks And Limiting Payouts

The Federal Reserve on Thursday placed new restrictions on the banking industry for the first time since the aftermath of the 2008 financial crisis, requiring big banks to temporarily suspend share buybacks and cap dividend payments at current levels.

 

The Federal Reserve announced the results of its annual stress test, finding that “several” big banks could get uncomfortably near minimum capital levels if the coronavirus pandemic worsens.

 

The Fed also placed new temporary restrictions on banks, requiring them to suspend share buybacks and cap dividend payments for the third quarter of 2020—though it stopped short of barring banks from paying dividends altogether.

 

In addition to their normal stress test, Fed officials also assessed the resiliency of large banks under three coronavirus-related downside scenarios: Those 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%, the Fed announced. Loan losses for the country’s 34 biggest banks ranged between $560 billion and $700 billion.

 

The banking industry will also face increased scrutiny going forward, with major banks now having to resubmit their payout plans later this year, for the first time in the history of the Fed’s stress test.

 

While banks are widely seen as being far better off than they were during the 2008 financial crisis, the Fed’s decision acknowledges that major institutions are still vulnerable to the economic downturn caused by the pandemic.

 

Medical experts are increasingly worried that new coronavirus cases in the United States, which hit their highest levels since April, could hinder an economic reopening and recovery: States like Texas, Florida, California and Arizona are all reporting record numbers of new infections.