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  • 00:00The Fed has found that U.S. banks and foreign affiliates based here are well capitalized and generally in good shape. However share buybacks are going to be suspended for the third quarter . Dividends are not but they are capped. We'll have more on that in just a second. But first it's important to note that there are several twists to this year's stress tests and C car. They combine the two the analysis of bank capital and the analysis of bank capital payouts. The Fed's analysis this time based on the most severe stress scenario. Thirty three banks were tested. I think we have a chart that shows some of the bigger banks and what their capital would diminish to under this severe scenario . You're supposed to have at least 4 percent in Tier 1 equity capital all of them as you can see due. But some of them come close. They also need combined Tier 1 and Tier 2 capital of 8 percent and a capital buffer you buffer that is reformulated this year. It's called the stress capital buffer. Now it's going to be different from each firm and that's not being disclosed today. The banks are being told starting next week they can let us know if they want what their additional capital requirement is but they don't have to disclose it until August when the Fed will make all that public. Now none of this means they can pay out a lot of capital yet because of covered. The Fed added another layer of examinations onto the process this year that they're calling sensitivity analysis. What would happen not to individual banks but banks in aggregate under three scenarios going forward a V shaped recovery a U shape recovery and a W shaped recovery. Under those scenarios projected loan losses for the banks would be between 560 and 700 billion dollars. Aggregate capital ratios would decline from 12 percent in the fourth quarter of 2019 to between nine and a half and seven point seven percent. The Fed's conclusion from the sensitivity analysis is most firms remain well capitalized but several would approach minimum capital levels. And so here's the important part for investors. The Fed has decided that share repurchases are suspended for quarter 3. Many banks suspended them in the second quarter. They've got to continue suspending them in the third quarter. Dividend payments will be capped and they will be limited by income. The average net income for banks over the prior four quarters. Banks are also going to be required now to reassess their capital plans taking into account this sensitivity analysis and their results. And then the Fed may do additional stress tests analysis later this year. And so sometime in the late summer or fall we will find out when or if the banks can increase their payouts. The Fed may decide to just leave this suspension in place. And finally we should note one member of the Fed strongly dissented with the rest of the board's decision. Lael Brainard said quote This is a time for large banks to preserve capital so they can be a source of strength in a robust recovery. I do not support giving the green light for large banks to deplete capital which raises the risk they will need to tighten credit or rebuild capital during the recovery. The Fed's vice chairman in charge of supervision Randall Quarrels said he thinks that this system works. It's prudent. It makes the banks conserve some capital while still enabling them to give out some of their profits to their shareholders .
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Fed Caps Bank Dividends, Bans Share Buybacks Through September

  • What'd You Miss?

  • TV Shows

June 25th, 2020, 9:07 PM GMT+0000

The Federal Reserve told the biggest U.S. banks they can’t increase dividends or resume buybacks through at least the third quarter as uncertainty over the course of a global pandemic weighs on lenders. Bloomberg's Mike McKee reports on "Bloomberg Markets: What'd You Miss?" (Source: Bloomberg)


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