“The payouts will amount to a depletion of loss-absorbing capital,” she wrote in a statement. “This is inconsistent with the purpose of the stress tests, which is to be forward-looking by preserving resilience, not backward-looking by authorizing payouts based on net income from past quarters that had already been paid out.”
Banks have been pushing the Fed to allow them to continue paying dividends, worried that restricting the regular payouts will hit their stock prices. But watchdog groups have been critical of the Fed’s leniency, pointing out that in the 2008 financial crisis, officials allowed money to walk out the door by failing to curb payouts, worsening the financial situation for struggling banks that ultimately failed.
For the largest banks, buybacks make up a bigger share of overall capital distributions while dividends are a smaller chunk. Of the $143 billion that the six biggest banks spent on capital distributions last year, $107 billion went to buybacks and $36 billion to dividends.
Even without across-the-board dividend restrictions, the performance on the normal stress tests could hamper some banks’ ability to continue payouts.
JPMorgan Chase, Citigroup, Bank of America and Wells Fargo, the four largest banks in the United States, all came through the stress tests with sufficient capital, according to a New York Times analysis of the Fed’s results. But capital at the fifth largest, Goldman Sachs, fell slightly below the required level, according to the analysis. The result could complicate any plans the Wall Street firm had for paying out capital to its shareholders if it doesn’t rise to the required amount by late this year as part of a new regulatory framework.
The Fed’s stress tests were introduced after the 2008 financial crisis as a way of making sure regulators had an up-to-date grasp of the risks in the banking system — something they lacked before the housing market crash. The exams focus on how much capital a bank would have left after the different stress scenarios.
Capital is money banks don’t have to pay back to creditors and depositors. The more capital they have, the more losses they can theoretically absorb.
Article source: https://www.nytimes.com/2020/06/25/business/economy/fed-dividend-buyback-limits.html
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