The Fed is cracking down on big banks to guard against risk posed to the financial system from coron

[Eugene]

Source: Washington Post

The Fed is cracking down on big banks to guard against risk posed to the financial system from coronavirus

The pandemic downturn marks the first time the Fed has issued such across-the-board limits on the largest banks since the aftermath of the Great Recession

By Renae Merle and Rachel Siegel
6/25/2020, 6:01:15 p.m.

For the first time since the aftermath of the Great Recession, the Federal Reserve is putting new restrictions on how the country’s biggest banks spend capital, with an eye toward protecting the financial system from risks to the economy posed by the coronavirus pandemic.

The Fed ordered the country’s 33 biggest banks, including JPMorgan Chase, Wells Fargo and Bank of America, to suspend their stock buyback programs and limit dividend payments to shareholders in the third quarter. The banks must also submit new plans for maintaining enough of the capital needed to survive a downturn.

A Fed analysis of the banks’ finances showed that they are in good shape now but that some could struggle in the worst-case scenarios of the economic recovery. “The banking system remains well capitalized under even the harshest of these downside scenarios — which are very harsh indeed,” Fed Vice Chair Randal Quarles said in a statement.

However, if there is slower U-shaped recovery or a W-shaped scenario in which a brief recovery is followed by a harsh second drop later this year, several financial firms “would approach minimum capital levels,” according to a Fed statement. The banks reviewed could incur loan losses of $560 billion to $700 billion under some scenarios, the Fed found.

Not all Fed board members thought regulators have gone far enough in reining in the banks. Board governor Lael Brainard called on the Fed to block dividend payouts to shareholders during the third quarter, not just limit them.

-snip-

Read more: https://www.washingtonpost.com/business/2020/06/25/fed-stress-test-coronavirus/

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Source: Reuters

BUSINESS NEWS JUNE 25, 2020 / 4:42 PM / UPDATED 3 MINUTES AGO

Federal Reserve caps bank dividend payments after pandemic analysis

Pete Schroeder, David Henry
4 MIN READ

WASHINGTON/NEW YORK (Reuters) - The U.S. Federal Reserve announced on Thursday it will cap big bank dividend payments and bar share repurchases until at least the fourth quarter after finding lenders faced significant capital losses when tested against an economic slump caused by the coronavirus pandemic.

In its analysis, the Fed found that the country’s largest lenders have struggled to model the unprecedented downturn and ensuing rescue programs, adding to already unprecedented uncertainty about how banks and the economy overall would perform in the coming months.

The Fed did not say how each bank fared under the pandemic analysis, but found the 34 tested firms could suffer as much as $700 billion in aggregate loan losses under the most severe, “W-shaped” economic recovery.

Shares of banks including JPMorgan Chase & Co (JPM.N), Bank of America Corp (BAC.N), Citigroup Inc (C.N), Wells Fargo & Co (WFC.N) and Goldman Sachs Group Inc (GS.N) tumbled in after-hours trading on the news, having risen earlier in the day.

The Fed determined that although banks could weather a severe, tumultuous and prolonged economic downturn, several would cut close to their minimum capital requirements.

-snip-

Read more: https://www.reuters.com/article/us-usa-fed-stresstests/federal-reserve-caps-bank-dividend-payments-after-pandemic-analysis-idUSKBN23W3AA

[elleng]

1. U.S. banking regulators ease rules around firm investments, internal trading.

'U.S. banking regulators on Thursday unveiled new rules that will make life easier for large banks with complex trading and investment portfolios.

One rule wraps up a long-running effort by Republicans to overhaul the so-called “Volcker Rule,” clearing the way for banks to make larger investments in riskier vehicles like venture capital funds.

The second relieves banks of having to set aside cash to safeguard derivatives trades between affiliates within the same firm. It gives a win to big global banks that had lobbied for the relief, and the industry estimates it could free up as much as $40 billion in previously reserved cash.

The Federal Deposit Insurance Corporation, Federal Reserve, Office of the Comptroller of the Currency, Securities and Exchange Commission and the Commodity Futures Trading Commission share responsibility for the Volcker rule. The FDIC, OCC and Fed are primarily responsible for the rules on “inter-affiliate” swaps. Each agency is expected to formally approve the changes.'

https://www.democraticunderground.com/10142523295

[kurtcagle]

2. One interesting thesis I read a few years back

raised the thesis that the Depression was needlessly extended due to the refusal of companies to limit dividend payments rather than invest that money into jobs and R&D. This served to keep money moving only at the very top of the economy rather than distributing it widely, increasing the overall velocity and helping small to intermediate companies to survive and expand. Roosevelt's response after this was to raise taxes on the upper class to 90%, something that actually provided enough juice to help when the US entered the war against Japan.