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US banks: limits on shareholder remuneration extended

Published on October 05, 2020 - 2 mins reading time
Bank watch
Last June, on the basis of stress tests carried out on 34 institutions, the US Federal Reserve decided to limit dividends paid by major banks and to ban share buybacks in the 3rd quarter. These bans will be extended until the end of the year.

Up to $700 billion in losses

The "stress tests" carried out by the FED in the face of various recession scenarios linked to the coronavirus show that 34 major banks could incur losses of up to $700 billion. While the central bank believes that these institutions should be able to withstand a severe and prolonged recession, it indicates that many would find themselves close to the minimum capital requirements. As a result, it has capped the dividends that US banks will pay out in Q3. These may not exceed those of the 2nd quarter.

Another decision taken by the U.S. Federal Reserve was toban share buybacks, another means of remunerating shareholders, at least for the 3rd quarter.

Preserving bank liquidity

To help the banking system cope with the Covid-19 crisis, the regulator has extended these emergency measures. Banks will have to continue limiting shareholder remuneration until the end of the year, in order to preserve their liquidity during this period of economic uncertainty. Banks with assets in excess of $100 billion will not be able to carry out share buyback programs for a further three months. The US central bank had not resorted to these actions since the 2008 financial crisis.

New stress tests scheduled by the end of the year

The FED wishes to ensure the solidity of the banks and has announced that new "stress tests" will be carried out in the 4th quarter of 2020. The results will be published by the end of the year. The scenarios forecast a 9-quarter recession and are "significantly more severe than most projections ", according to the FED.

This is the first time that the regulator has implemented two phases of testing in just one year. In addition to the annual stress tests introduced by the Dodd-Frank Act, the purpose of these tests is toassess a financial institution's losses and the capital it would need to withstand a financial crisis. A distinction is made between global stress tests, which cover the banking establishment as a whole, and partial stress tests, applied to a restricted perimeter of its activity. Today, these exercises are essential to assess banks' ability to withstand potential economic shocks, and to implement appropriate solutions.