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Fed caps dividends

Lachlan Maddock
— 1 minute read

The Fed will place a cap on dividends paid by American banks after extensive stress testing revealed they could eat into their capital buffers.

The Fed tested three downside scenarios – V-shaped, U-shaped, and W-shaped – and determined that loan losses for 34 American banks would range from $560 billion to $700 billion. While most firms would remain well capitalised – even under the more extreme scenarios – several would approach minimum capital levels. 

“In light of these results, the board took several actions following its stress tests to ensure large banks remain resilient despite the economic uncertainty from the coronavirus event,” the Fed said in a statement. “For the third quarter of this year, the board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income.

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“The board is also requiring banks to re-evaluate their longer-term capital plans.”

No share repurchases – which have represented approximately 70 per cent of shareholder payouts for the last several years – will be permitted in the third quarter, while the Fed will also cap dividend payments to the amount paid in the second quarter and will further limit them to an amount based on recent earnings. 

"The banking system has been a source of strength during this crisis,” said vice-chair Randal K. Quarles, “and the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.”

APRA took similar action at the height of the COVID-19 crisis, warning banks to think twice before paying out a dividend in order to preserve their capital buffers, but stopped short of actively prohibiting banks from doing so. 

“During this period, APRA expects that ADIs and insurers will seriously consider deferring decisions on the appropriate level of dividends until the outlook is clearer,” said APRA chairman Wayne Byres. “However, where a board is confident that they are able to approve a dividend before this, on the basis of robust stress testing results that have been discussed with APRA, this should nevertheless be at a materially reduced level.”

 

Fed caps dividends
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