U.S. Federal Reserve Orders Banks To Cap Dividends And Halt Share Buybacks

The U.S. Federal Reserve has told the biggest American banks that they can’t increase dividends or engage in share buybacks until at least September as uncertainty over the COVID-19 pandemic weighs on lenders.

The industry performed well in annual stress tests, according to a statement Thursday from the U.S. central bank, but a separate review of the effects of the coronavirus on the economy and financial system uncovered potential risks that left the fate of their dividends in question.

The Federal Reserve "is taking action to assess banks’ conditions more intensively and to require the largest banks to adopt prudent measures to preserve capital in the coming months," the central bank said in the statement. "The banking system remains well capitalized under even the harshest of these downside scenarios."

The Federal Reserve put a halt on share buybacks and capped bank dividends at second-quarter levels and said future payouts would be limited by a formula based on recent earnings.

Goldman Sachs Group Inc. and Morgan Stanley fared the worst in the stress tests, with their capital levels declining 6.4 and 5.5 percentage points, respectively, under a hypothetical economic crisis devised by the Fed. Both firms were expected to do worse than other banks because their businesses are more reliant on capital markets, which take a heavier beating in the regulator’s crisis scenario.

This year’s stress tests included a new "sensitivity analysis" that sought to capture how financial firms are positioned to handle financial pressure caused by the pandemic. Policy makers considered three potential scenarios. Results from the quick-recovery, V-shaped outcome echoed those of the regular stress tests, with the aggregate capital level of the firms dropping by 2.5 percentage points versus 2.1 in the analysis that didn’t take into account the pandemic.

But a slower recovery would mean a much harsher impact on American banks, with the group’s capital declining 3.9 percentage points in the U-shaped rebound and 4.3 percentage points in the longest, W-shaped scenario, which assumes a second wave of coronavirus containment measures.