Fed, "US Bank Dividend and Share Buyback Regulations"

Bank Soundness Remains Good but Worst-Case Scenario Could Incur $700 Billion Loss
Bank Stocks Surge on Volcker Rule Easing Hopes, Turn Weak in After-Hours Trading

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] The U.S. central bank, the Federal Reserve (Fed), has moved to restrict banks' dividends and share buybacks.

The Fed announced this in the results of its stress tests on banks released on the 25th (local time).

According to The Wall Street Journal, the Fed assessed that major U.S. banks can withstand the COVID-19 crisis.

However, it expressed concern that in the worst-case scenario, where economic recovery is delayed and the unemployment rate reaches 19.5%, 33 major banks could incur losses amounting to $700 billion. The Fed did not disclose individual bank evaluation results in this test.

The Fed explained, "In the worst-case scenario, bank capital could be eroded, potentially disrupting normal financial activities."

In this regard, the Fed decided to restrict banks' dividends and share buybacks. This is interpreted as a preemptive measure to prevent capital expenditures and prepare for a worst-case scenario where the banking system's operation is limited.

Accordingly, banks will not be able to pay dividends exceeding the average quarterly earnings of the past four quarters, The Wall Street Journal reported. Banks are also prohibited from share buybacks during the third quarter. However, most banks have already agreed to halt share buybacks.

CNBC reported that, for the first time since the introduction of stress tests following the financial crisis, banks will be required to report capital distribution plans in the second half of the year as well.

The Wall Street Journal explained that this year's stress tests were conducted more rigorously than in previous years to verify the soundness of the banking system amid the COVID-19 situation.

Bank stocks, which had surged earlier on news of the relaxation of the Volcker Rule limiting banks' equity investments, showed weakness in after-hours trading following the Fed's stress test announcement restricting dividends and share buybacks.

This content was produced with the assistance of AI translation services.