The Federal Reserve puts new restrictions on how the country’s biggest banks spend capital for the first time since the aftermath of the Great Recession. Moreover, it now has an eye toward protecting the financial systems. It wants to protect it from risks to the economy posed by the coronavirus pandemic.
The Federal Reserve ordered the country’s m33 biggest banks to suspend their stock buyback programs and limit dividend payments to shareholders in the third quarter. The list of banks includes Bank of America, Wells Fargo, and JPMorgan Chase. Moreover, banks have to submit new plans to maintain enough of the capital needed to survive a downturn.
The Federal Reserve analyzed the banks’ finances. The analysis showed that they are in good shape now. Nevertheless, some might struggle in the worst-case scenarios in the economic recovery. Randal Quarles is the Federal Reserve’s Vice-Chair. He said that the banking system currently remains well-capitalized under even the harshest of these downside scenarios. Those scenarios are very sharp indeed.
Nevertheless, there will either be a slowed W-shaped scenario or a U-shaped recovery. In this scenario, a sharp second drop later this year will follow a brief comeback.
Thus, several financial firms will approach minimum capital levels. The reviewed banks could incur loan losses of $560 billion to $700 billion under some scenarios. That is what the Federal Reserve has found.
Not all the Federal Reserve board members thought that regulators have gone far enough in reining in the banks. Lael Brainard is a board governor. She called on the Federal Reserve to block dividend payouts to shareholders amid the third quarter, not just limit them.
President Barack Obama appointed Brainard. She said that she does not support giving the green light for large banks for depleting capital. This is because it raises the risk that they will need to tighten their credit and then rebuild capital during the recovery. That policy is failing to learn a vital lesson of the financial crises. Thus, Brainard can not support it.
Moreover, she added that the Federal Reserve’s approach creates a significant risk. The risk is that banks will need to curtail credit and raise capital at a difficult time.
The Federal Reserve was also criticized for not offering the bank-by-bank results of its reports. Senators Elizabeth Warren (D-Mass.), Brian Schatz (D-Hawaii0, and Sherrod Brown (D-Ohio), wrote a letter on Tuesday to Fed chair Jerome H. Powell and Quarles. They said that the decision was very disconcerting. Moreover, they noted that transparency that surrounds the results of the tests is a bedrock principle of the stress testing framework.
The decision of the Federal Reserve adds to the already bleak reality. That reality is gripping the American economy amid the worst recession since the Great Depression.
More than 30 million Americans had claimed unemployment benefit as of earlier this month. Each week, more significant companies keep filing for bankruptcy.
There is thus a problematic situation in the United States. Nevertheless, the government is trying its best to fix it. Still, they are analyzing every step they make. Sometimes there is no time for that, though. Let us see what happens.