The Federal Reserve said on Friday that the largest banks in the financial system had the means to withstand a severe economic shock due to the pandemic and that they would be able to return more money to shareholders early next year, as long as they show profitability.
In June, the Fed granted temporary caps to shareholder payments by the country’s largest banks, including JPMorgan Chase, Bank of America and Wells Fargo, banning them from buying their own shares or increasing dividend payments. Regulators have tried to ensure that banks remain strong enough to continue lending as the economic consequences of the pandemic deepen.
Now, the Fed is telling banks that they can distribute cash to shareholders through redemptions as well as dividends, as long as these total amounts are no higher than the average earnings of a bank in the last four quarters. Minutes after the regulator’s announcement on Friday, JPMorgan Chase said it would buy back $ 30 billion of its shares in the first three months of 2021.
The Fed typically conducts “stress tests” on its 33 large banking companies, which it oversees once a year, a practice implemented by the Dodd-Frank Financial Reform Act introduced after the 2008 financial crisis. These tests were conducted in June. , when payments have been reduced. However, this year, due to the pandemic, the Fed also held a special round of analysis this month.
This second round of tests focused specifically on the ability of banks to withstand the severe recessions resulting from the pandemic, which had devastating economic consequences around the world. Economists have analyzed two different pandemic scenarios – a long and lasting recession and a severe and short one. Both were worse than the Fed’s scenarios during the previous round of routine testing this year.
“Today’s stress test results confirm that large banks could continue to lend to households and businesses, even during a strong downturn in the economy,” said Randall K. Quarles, the Fed’s chief supervisory officer. with banking regulations, in a statement accompanying Friday’s results.
Business and economy
The Fed Council’s vote to allow banks to resume share buybacks was not unanimous. Lael Brainard, a Fed governor, agreed.
“For many large banks, projected losses take capital levels very close to the minimum requirement, in the range in which banks tend to withdraw from loans, even before payments,” she said in a statement on Friday. “Today’s action almost doubles the amount of capital allowed to be paid compared to last quarter. Prudence would require more modest payments to keep loans to households and borrowers in an extremely difficult winter. “
The results come at a time when vaccines have created hope for a strong economic recovery in 2021, but the short-term outlook is bleak. Coronavirus cases are on the rise, unemployment insurance claims remain historically high, and retail spending is declining. Small businesses, homeowners and other borrowers could struggle in the coming months, with possible implications for the banks that lend them.
In the first scenario applied to banks in the most recent tests, unemployment quickly reached 12.5 percent before returning to 7.5 percent, while GDP fell by 3.25 percent. Second, unemployment did not rise as high as 11%, but remained significantly above the desired rate for longer.
The results of the Fed’s stress test in June included a new set of scenario analyzes that looked at how banks could withstand a variety of possible pathways that the pandemic has taken. In that previous release, the Fed did not disclose how individual banks evolved in each scenario.
On Friday, he provided details on the performance of each bank in the two severe stress scenarios, although without commenting on the performance of individual banks. The Fed said none of the banks’ capital fell below the minimum amount required overall.
Throughout 2020, banks pushed the Fed to allow them to continue to pay dividends, worried that the restriction of regular payments would affect their share prices. But watchdogs criticized the Fed’s leniency, pointing out that in the 2008 financial crisis, officials allowed banks to continue to pay shareholders, which worsened the financial situation of failed banks.
The central bank has restricted redemptions, which account for a larger share of global capital distributions for the largest banks. This means that cash distributions for shareholders in companies such as JPMorgan, Citigroup and Bank of America could return. Even Wells Fargo, which reported a loss in the second quarter of this year, could start distributing more money, as the average of its most recent four quarters still indicates profitability.