Coronavirus Recession: Federal Reserve Limits Bank Dividends, Blocks Stock Buybacks To Protect Financial System

The Federal Reserve on Thursday ordered the nation’s largest banks to limit dividend payments in the third quarter and blocked them from stock buybacks to protect the financial system from damage resulting from the coronavirus pandemic -- the first time such action has been taken since the aftermath of the Great Recession.

Most of the largest banks had agreed to halt buybacks in the second quarter.

In releasing the results of its latest stress test on the nation’s 34 largest banks, the Fed said the banking system remains strong despite the pandemic, which has played havoc with the nation’s economy.

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

In a separate statement, Fed Gov. Lael Brainard said the central bank should have blocked dividend payouts to shareholders in the third quarter, not just limited them.

“This is a time for large banks to preserve capital, so they can be a source of strength in a robust recovery,” she said. “This policy fails to learn a key lesson of the financial crisis, and I cannot support it.”

The Fed analysis included sensitivity analysis of three hypothetical recessions, examining what would happen in a V-shaped recovery, a U-shaped recovery and a W-shaped double-dip recession.

“Under the U- and W-shaped scenarios, most firms remain well capitalized, but several would approach minimum capital levels,” the Fed said. “The sensitivity analysis does not incorporate the potential effects of government stimulus payments and expanded unemployment insurance.”

Sens. Brian Schatz, Sherrod Brown and Elizabeth Warren had urged the Fed to release banks’ individual results, but Thursday’s report did not go into individual details.

"This decision could undermine confidence in the banking system,” the senators wrote in a letter to Quarles and Fed Chairman Jerome Powell.

Gregg Gelzinis, a senior policy analyst for the Center for American Progress, told the Washington Post releasing an aggregate report undermines its usefulness.

The Fed also finalized changes to the swap margin rule and altered the so-called Volcker rule, effective Oct. 1.

The Volcker rule generally prohibits banks from “engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring or having certain relationships with hedge fund or private equity fund.”

The action streamlines the covered funds, addresses extraterritorial treatment of certain foreign funds and permits banks to “offer financial services and engage in other activities that do not raise concerns that the Volcker rule was intended to address.”

The action came as the Labor Department reported 30 million people were receiving unemployment benefits and a number of states were experiencing surges in case counts and hospitalizations, complicating efforts to reopen the economy.