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Federal Reserve reins in bank spending on pandemic fears

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The Federal Reserve is making life a little harder for Jamie Dimon and his fellow big bankers until it gets more clarity on just how painful the coronavirus pandemic will be for the American economy.

On Thursday, the Fed unleashed a series of restrictions on bank operations over the next few months, including a hard cap on the size of the dividends banks can award shareholders, as well as a temporary ban on stock buybacks.

The central bank’s actions came after its annual tests to gauge the health of large financial institutions — introduced after the 2008 mortgage meltdown — showed that COVID-19’s economic impact could deplete big lenders’ capitals to dangerous levels.

Since the last financial crisis, Dimon and his peers have used share buybacks and dividends to keep their stock prices soaring. But the Fed on Thursday made it clear that it’s worried such spending could deplete much-needed cash in the wake of a pandemic that has pushed unemployment rates to new heights.

“There is material uncertainty about the trajectory for the economic recovery and its impact on banking organizations,” Fed Vice Chairman Randal Quarles wrote in a statement. “As a result, the board 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 Fed is also demanding that banks resubmit their capital plans for a second time later this year just to be safe — another burden for banks. This is the first time that the Fed has exercised the option to make banks submit their stress tests twice in one year since the practice began in 2009.

Banks investors bemoaned the precautions by pushing bank stocks down in late trading. But at least one Fed board member says the lending industry was let off too easy.

“This policy fails to learn a key lesson of the financial crisis, and I cannot support it,” Fed Governor Lael Brianard wrote in a statement critical of the decision to allow dividends of any size.

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