Fed caps large bank dividends, bans Q3 stock buybacks

• The Fed tells banks they must keep Q3 dividends at Q2 levels and forbids them from buying back shares in Q3 in order to preserve capital.
• It's also requiring that banks re-evaluate their longer-term capital plans.
• "All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty," the Fed said in its statement.
• The board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.
• As for the actual stress tests, results show that "all large banks remain strongly capitalized," the Fed said.
• It also won't object to five foreign banks whose capital planning practices were evaluated as part of the stress tests.
• Fed Governor Lael Brainard objects to allowing banks to continue paying dividends thanks to the change in financial conditions caused by the COVID-19 pandemic.
• "I do not support giving the green light for large banks to deplete capital, which raises the risk they will need to tighten credit or rebuild capital during the recovery," she wrote in a separate statement.
• "Temporarily halting shareholder payouts at large banks due to the COVID-19 shock would create a level playing field and allow all banks to preserve capital without suffering a competitive disadvantage relative to their peers," she said.
• Under ghe central bank's new sensitivity analysis, loan losses for the 34 banks ranged from $560B to $700B and capital ratios declined from 12.0% in Q4 2019 to between 9.5% and 7.7% under the  hypothetical downside scenarios.
• Under the U- and W-shaped scenarios, most firms remain well capitalized but several would approach minimum capital levels, the Fed said.

Comments

[Dom Rome]

US BANK CORP is going to emerge a beast in its sector

[TheBot]

A government-made crisis that leads to more government control of the banks...where have I seen this before? Hmmm...🤔 If you ask me, the only reason the banks haven't been nationalised yet is because regulators need to blame "capitalism" every now and then to justify their jobs.

[22023171]

It hasn't lead to more control of banks. They have always been subject to reviews by regulators and stress test being performed since the credit crisis 12 years ago.

[User 51751095]

Yes as typically are always happens with progressives? The cost of regulation has destroyed competition like credit unions. So the concentration of the large banks has never been greater.

I can only imagine what Biden's handlers will inflict on banking should he win.
Social Justice out of Barmy Franks forced large banks to make joke loans.

[User 49655511]

@22023171 the credit crisis is what he was referring to when he said "where have I seen that before"

[hkimsey]

Just set capital level targets and leave the banks alone as to how they accomplish that.

[TimBandito]

Can someone help me understand how to analyze the firm specific results found Appendix B of the Stress Test?

Is the most important metric the projected net income through 2022?

Basically, if the Fed projects that a bank will have positive net income even in most severe scenario then it's resilient and probably a good investment?

For ex: BAC has projected net income of -25.6 billion while The Bank of New York Mellon is projected to have net income of 4.4 billion...so Mellon is theoretically the safer invetment?

[Good Walk]

The entire exercise is a fairy tale. Bank earnings and capital hinge upon actual provisions for loan losses that will be booked in 3Q and 4Q. This 'unknown' renders stress test data worthless. The current economy will stress banks far beyond the assumptions made in the 2020 testing scenarios.

Tell me about the rabbits, George.

[CapVandal]

I have to say, I have changed my mind. Management wants to suspend dividends. Remember Jamie Diamond's comments?

There is too much emphasis on dividends being sacrosanct. Just suspend them already and announce that banks will not resume buybacks until the suspended dividends are repaid through special dividends.

Under the current conventions, companies don't cut until they are substantially impaired and then reluctantly increase dividends. The result being that a 50% cut may end up taking years before it is restored.

Buybacks have been particularly harmful for banks, as they always buy high and issue equity at the worst possible times. In the future, I will always do the opposite and sell fractional positions to reverse the impact of buybacks. Buybacks are usually effective for high ROIC firms and much less so for lower ROIC firms.

[sdz]

So, you are saying that my earned capital, which I invest to provide income, is just to be taken for granted? Is my investment a charitable contribution? To whom? Of course dividends should be paid, or you are just taking my hard earned money and taking advantage of me and my labor. Shame on you for giving away what is not yours!

[Diego Montalbon, raconteur]

Good ! This is what stress tests are supposed to do.
Limit C-level bonuses before dividend cuts.
Next up:
Claw back private equity fees from firms bankrupted by unsustainable debt burdens
forced on them by private equity only interested in tax advantaged rentier fees.

[BeneGesserit]

Interestingly enough Bank of America is trading at the exact same price as when their Corporate HQ was dedicated in October 1992.

[GotsToGetMineFirst]

Too lazy to look but probably been some splits along the way huh?

[EriCoin]

Great opportunity to add in to my JP Morgan shares. The banks are financially astute and the government is putting unnecessary intervention. This is not 2008..the banks are not the cause nor they are to blame for not having enough liquidity.

[Chancer]

The Fed tells us that banks are safe if they pass the stress tests. But obviously NOW, the Fed thinks that passing stress tests is NOT enough to maintain safety.

Now, the Fed has to go further into micro managing banks by denial of their right to make their own decisions about increasing dividends and buybacks.

Does the Fed need to put their representatives in all the "too-big-to-fail" banks to approve or veto ALL of management decisions?

[jimbo162]

Passing stress tests are kind of a joke....the bank passes if it maintains at least 3.5% of deposits. Any run on the bank causes problems cause they only hold 3.5% of our deposits....are you comfortable with 3.5%? It scares the heck out of me.

[Jamjack]

With restrictions like this who would want to buy stock in a bank. what does that do it puts pressure on the price to go down. rthe only reprieve is the dividend in this horrible low interest environment for savers. Avoid the banks I think. long BAC.

[GearDownBigShifter]

@Jamjack if price goes down it’s perfect opportunity to buy. Then sell when restrictions are lifted and stocks go up. Earn dividends in the middle. Seems like a no brainer.

[cachinga]

@CPT Dan And restrictions will be lifted when? Endless wait. Put your money elsewhere..especially since now dividends could very well be cut.

[Fundflow]

@CPT Dan agreed. but you have to wait and be willing to accept the lower dividend. Then realize that it will take a while for the price to recover and that the lower dividend may take years to come back up. The dividends for some banks [WFC comes to mind] are too large now compared to peers.

[uokoro1]

The stress test did not tale into account the 3 trillion spent by the gov. And still the banks are able to absorb loss over 700billion with no problem. I think the fed estimates of loss is way high.

[jimbo162]

"Way too high"? Since when....I think many underestimate the threat to the banking industry. Of course the FED runs the printing press, this will get much larger than TARP. Also wondering who these "5 foreign banks" are, can only assume DB is number one.

[Sleepless@FED]

Some think the estimates are overblown...
During GFC, provisioning done by banks was 2.5 times the actual write offs that eventually happened. But Covid-19 could cause more widespread bankruptcies than in 2008 as Commercial Real estate, Oil exploration, Airlines, Cruiselines, Mall-based retailers, Hotels and Resorts, Movie theaters and Restaurants were all simultaneously
hit. Growing unemployment could force provisioning on mortgages too...better to be conservative and preserve capital than allow generous dividend payments...Q3 results could give more color on non performing assets on bank balance sheets

[Exile of the Mainstream]

So the large MCBs were a healthy part of the economy at the start of 2020. Well, capitalised and not going as much risky things as a decade ago. They had decent profits and decent dividend/buyback yields.

In 3 months the Fed has screwed their NIM's by compressing the yield curve. And now are screwing them by controlling shareholder return policies. And then increasing stress tests.
I get it's prudent to ensure they don't do stupid stuff and screw the system even more. But, how are these private enterprise if the Fed controls how much money they make and how much they can return to shareholders.

[Wolverine78]

Agreed. I guess being To Big to Fail the first tine around has real consequences. Anyone who thought they “got bailed out” was wrong. They got nationalized.

[LongHoller]

@Wolverine78 Any pity for the banks is completely wasted. They would nationalize only if that served the interests of the top 1% who run that show, make all the rules.

[sdz]

They won't overtly nationalize the banks because they would then have to pay the shareholders for taking their property (it's in the Fifth Amendment of the Constitution). Besides, fining, taxing, and suing the banks is a profitable sideline for the government. The slippery slope marks our progress from "Goldilocks" to "Robin Hood" (that is not a good thing).

[awcabot]

I guess WFC’s dividend increase in July is postponed. I hope it is only up to October and not any later.

[cachinga]

@awcabot Increase? Lucky if it stays the same. Had so many cuts and suspensions..Fed has no clue what retirees are going through. Do they even look at pension funds?

[moksamat]

One more step in exposing Credit Unions and Custodial Banks loan risk in the next real estate up-leg. The last 2.5% will be the too bog too fails. Prepare for the 80's all over again but tighter frequency and higher pitch!

[Hamilton County]

FED stress test underestimates severity.

[meng3838]

The stress test results show US banks are in good shape. Although in the worst case scenario, there is some stress but otherwise things seem fine. Also, as expected by the bank analyst Mike Mayo, the FED did not make banks totally cut or suspend dividends but just cap the dividends they can pay out. I thought these results are positive but the extended hours trading show otherwise..:((

[kumarchethan2807]

@meng3838 Same thoughts. I don't what caused the sell off. The dividends are not eliminated and no red flags.

[JZahra]

markets expecting too much.

[IP Banking Research]

@meng3838buy the rumours sell the facts. Suspect banks will be up today

[Bruce Bohannon]

Man speak with Forked Tongue....

[Bruce Bohannon]

What?... Read every word here and the link. Can't tell how the announcement and result affects MY Bank other than 'WE' will need to resubmit info to Fed Each Qtr.. Joy.....

[cachinga]

The Fed runs the banks. The more I read about it, it's almost like passive ownership.