Federal Reserve weighs extending bank dividend caps as stress tests resume

[WASHINGTON] The Federal Reserve, which just started a second round of Wall Street stress tests, is considering extending the unprecedented constraints on dividend payments and share buybacks it imposed on the US's biggest banks.

In a Thursday statement, the Fed said it will decide in the next two weeks whether to prolong the limits, which are scheduled to lapse at the end of the third quarter. Any extension through the end of the year would likely disappoint banks, as JPMorgan Chase & Co has already indicated it might resume buybacks in the fourth quarter if allowed to by regulators.

The Fed announced the caps in June, restricting banks from increasing their investor payouts above second-quarter levels and banning all buybacks.

The regulator - under intense pressure from lawmakers who said banks shouldn't be paying dividends during a pandemic - said at the time that an analysis showed potential risks to lenders if capital distributions continued unabated.

The Fed also released two hypothetical stress situations Thursday that Wall Street banks will be tested against - scenarios that share some similarities with the economic damage triggered by the coronavirus.

Lenders' recent balance sheets, which already reflected some pandemic effects, will be evaluated.

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The regulator plans to reveal how banks fared by the end of 2020, though it didn't say whether the results would impact the industry's capital demands. Fed leaders have previously made clear that they'd prefer not to increase capital requirements in the midst of a crisis.

"Although the economy has improved materially over the last quarter, uncertainty over the course of the next few quarters remains unusually high, and these two additional tests will provide more information on the resiliency of large banks," Fed Vice-Chairman Randal Quarles said in the statement.

The second round of 2020 tests - spurred by the pandemic's economic crisis - marks the first time the Fed has examined banks more than once in a single year.

The exams will show how lenders would be impacted by unemployment spiking well above the Covid-fueled level it's at today.

One of the scenarios would assume a 12.5 per cent unemployment rate and 3 per cent slip in gross domestic product while also assuming greater havoc in overseas markets. The other would assume a less severe shock, though one that lasts longer.

BLOOMBERG