August 18, 2022

Federal Reserve Will Require More Banks to Submit Capital Plans

Bank holding companies with at least $50 billion in assets would be required to adopt “robust, forward-looking capital planning processes that account for their unique risks,” the Fed said in a statement.

Banks also would need to submit plans to raise dividends or repurchase stock as part of the Fed reviews, to begin early next year, the Fed said. Banks whose plans were rejected would have to get approval before distributing capital.

Some investors welcomed the tougher supervision, saying it was long overdue.

“This amount of oversight is something that has been lacking in the corporate board room in most banks,” said Joel Conn, president of Lakeshore Capital in Birmingham, Ala.

In March, the 19 largest banks, including Wells Fargo and JPMorgan Chase, completed capital reviews that allowed many to increase dividends or buy back shares. The new reviews are part of a broader effort, which includes the Dodd-Frank financial regulation legislation, to tighten supervision of financial companies and reduce the risk of another crisis.

Before the recent crisis, “many bank holding companies made significant distributions of capital, in the form of stock repurchases and dividends, without due consideration of the effects that a prolonged economic downturn could have on their capital adequacy,” the Fed said in its proposed rule.

The initiative may compel banks to hold additional capital and reduce profitability measured by return on equity, said Bert Ely, an industry consultant based in Alexandria, Va.

“There will be tremendous pressure to downsize,” he said, or have “financial engineers to come up with new forms of shadow banking” by moving activities outside commercial banks.

Article source: http://feeds.nytimes.com/click.phdo?i=edc1d70ae1f221ace58ee42cfbb55223

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