Fed Lifts Bank Share Buyback Restrictions for First Time in 12 Years... Volcker Rule Eased (Comprehensive)

Measures such as Dividend Freeze for Major Banks After Stress Tests
Relaxation of Bank Investment Restrictions 'Volcker Rule'... Venture Investment Allowed
Intended to Ensure Bank Soundness and Activate Venture Investment Amid COVID-19 Crisis

U.S. Federal Reserve (Fed) [Image source=AP News]

[Asia Economy New York=Correspondent Baek Jong-min] U.S. financial authorities are banning dividends and share buybacks by major banks for the first time in 12 years. However, they have decided to ease the 'Volcker Rule,' which regulates banks' proprietary investments established after the 2008 global financial crisis, signaling an encouragement for investment to revitalize the market.

According to the Wall Street Journal (WSJ) and others on the 25th (local time), the Federal Reserve (Fed) announced the results of stress tests on major U.S. banks including Bank of America, stating that dividends will be maintained at current levels during the third quarter, while share buybacks will be restricted. Although the Fed has conducted annual stress tests since the financial crisis, this is the first time since the 2008 financial crisis that all banks' dividends and share buybacks have been restricted.

The Fed stated that U.S. banks could face losses of up to $700 billion in the worst-case scenario of a prolonged economic crisis caused by COVID-19, but it judged that there would be no deterioration in capital adequacy that would impair the banks' core operations. Instead, the Fed required banks to resubmit their payment plans by the end of this year. CNBC reported that this is also the first time in the history of stress tests.

Under the worst-case scenario, the banks' common equity tier 1 capital ratio, which was 12% at the end of last year, is expected to fall to between 7.7% and 9.5%.

The Fed expressed concern that while most banks would maintain adequate capital ratios, some might approach the minimum capital levels. However, the Fed did not disclose which banks were approaching these conditions.

On the same day, the Office of the Comptroller of the Currency (OCC) approved amendments to the Volcker Rule to facilitate banks' increased investments in venture capital and similar funds. The Volcker Rule was implemented under the Dodd-Frank Act, a financial reform law introduced in 2010 by the Obama administration to prevent high-risk proprietary investments that led to the collapse of major banks during the financial crisis. The amendment mainly removes the requirement for banks to post margin on derivatives trades between affiliates. Bloomberg estimated that this removal could free up about $40 billion in funds. Along with the OCC, the Fed, Federal Deposit Insurance Corporation (FDIC), Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission (CFTC) also agreed to the amendment, which will take effect on October 1.

This move by financial authorities is interpreted as an intention to limit capital expenditures by banks amid the COVID-19 crisis while encouraging increased investment in the startup market. It prevents the reduction of capital through dividends and share buybacks and expands investment opportunities by easing the Volcker Rule.

Bloomberg assessed that this will complete the 'Volcker 2.0' initiative pushed by the Donald Trump administration and predicted a boom in funding for venture capital. Investment media Pimentis evaluated that U.S. banks will now be able to invest in high-risk venture capital funds that support new startups. This provides resources to support those who have started businesses amid the massive unemployment caused by COVID-19. Fed Vice Chair Randal Quarles stated in a statement, "Liquidity crises are a significant uncertainty in the economic recovery curve during the process of supporting the real economy," and added, "We expect banks to manage capital flows and liquidity risks prudently."

Meanwhile, U.S. bank stocks fluctuated significantly following the financial authorities' decision. On the New York Stock Exchange that day, major bank stocks including Bank of America (BoA), JPMorgan, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley surged due to the easing of the Volcker Rule. The stock prices even turned upward. However, after the Fed's restrictions on dividends and share buybacks were announced, most of the gains were given back in after-hours trading.

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