TOPLINE
The Federal Reserve on Thursday placed new restrictions on the banking industry for the first time since the aftermath of the 2008 financial crisis, requiring big banks to temporarily suspend share buybacks and cap dividend payments at current levels.
The Fed cracked down on big banks in an effort to protect the economy during the coronavirus ... [+]
KEY FACTS
The Federal Reserve announced the results of its annual stress test, finding that “several” big banks could get uncomfortably near minimum capital levels if the coronavirus pandemic worsens.
The Fed also placed new temporary restrictions on banks, requiring them to suspend share buybacks and cap dividend payments for the third quarter of 2020—though it stopped short of barring banks from paying dividends altogether.
In addition to their normal stress test, Fed officials also assessed the resiliency of large banks under three coronavirus-related downside scenarios: Those included a V-shaped recession and recovery; a slower, U-shaped recession and recovery; and a W-shaped, double-dip recession.
In the three downside scenarios, the unemployment rate peaked at between 15.6% and 19.5%, the Fed announced. Loan losses for the country’s 34 biggest banks ranged between $560 billion and $700 billion.
The banking industry will also face increased scrutiny going forward, with major banks now having to resubmit their payout plans later this year, for the first time in the history of the Fed’s stress test.
While banks are widely seen as being far better off than they were during the 2008 financial crisis, the Fed’s decision acknowledges that major institutions are still vulnerable to the economic downturn caused by the pandemic.
Medical experts have been increasingly worried that new coronavirus cases in the United States, which hit their highest levels since April, could hinder an economic reopening and recovery: States like Texas, Florida, California and Arizona are all reporting record numbers of new infections.
Crucial quote
“The banking system has been a source of strength during this crisis,” Fed Vice Chair Randal K. Quarles said in a press release. “The results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.”
Tangent
Federal regulators on Thursday also said they would ease some post-financial crisis restrictions on big banks. The Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corp. (FDIC) and Federal Reserve all approved changes to the Volcker Rule on Thursday, allowing banks to now make large investments into venture capital and similar funds. The OCC and FDIC also scrapped a requirement that lenders hold cash on margin when trading derivatives with different affiliates of the same firm, which will let banks pocket billions of dollars that would otherwise be set aside for derivatives trades. Shares of major banks soared on the news: JPMorgan Chase, Bank of America, Citigroup and Morgan Stanley gained more than 3%, while Goldman Sachs and Wells Fargo traded over 4% higher.
Key background
Expectations for a quick economic recovery are dwindling, after the Federal Reserve earlier this month provided a grim update on the economy. The Central Bank forecasted high unemployment will last for years and said interest rates will remain near zero until at least 2022. Fed Chair Jerome Powell reiterated that while “there is great uncertainty about the future,” the Central Bank is strongly committed to doing “whatever we can, for as long as it takes” to help support the U.S. economy.
Further reading
Bank Stocks Surge As Regulators Ease Volcker Rule, Morgan Stanley Jumps Over 2% (Forbes)
Federal Reserve Will Keep Rates Near Zero Until 2022 As Recession Continues (Forbes)
Dow Jumps 300 Points After Bank Regulators Ease Volcker Rule (Forbes)
IMF Slashes Global GDP Forecasts, Warning Of An Economic Crisis ‘Like No Other’ (Forbes)
