Fed Extends Limits On Buybacks, Dividends Until End Of 2020; Brainard Dissents

Two weeks after announcing it may extend the limit on dividends and buybacks for large banks – which was scheduled to expire today – by another quarter, after the close on Wednesday the Fed did just that saying that “due to the continued economic uncertainty from the coronavirus response”, it will extend for an additional quarter several measures “to ensure that large banks maintain a high level of capital resilience.” The news will disappoint bank execs such as Jamie Dimon whose JPMorgan had already indicated interest in resuming buybacks.

For the fourth quarter of this year, large banks—those with more than $100 billion in total assets—will be prohibited from making share repurchases. Additionally, dividend payments will be capped and tied to a formula based on recent income, the Fed announced.

To ease concerns that “it is seeing something others aren’t” the Fed clarified that “the capital positions of large banks have remained strong during the third quarter while such restrictions were in place.” Curiously, the Fed felt compelled to limit shareholder distributions in Q4 as well, almost as if it expects more turmoil to hit in the last three months of the year.

In June, the Fed released the results of its annual stress test and additional analysis, which found that all large banks were sufficiently capitalized. However, just in case they weren’t, the Fed also restricted banks from increasing dividends above second-quarter levels, and buybacks were banned. Those restrictions were less than the total elimination of dividends demanded by some Democratic lawmakers.

As Bloomberg notes, Fed governor Lael Brianard, who has expressed an interest in becoming the next Fed chair under a Biden administration, dissented in the 4-1 vote to extend the existing limits, having previously argued that allowing capital distributions “creates a significant risk that banks will need to raise capital or curtail credit at a challenging time.” It wasn’t immediately clear if her dissent was because she wanted a return of the pre-covid status quo or because she preferred an indefinite extension of the bank capital limits.

Also, as announced in mid-September, the Fed confirmed it would conduct a second stress test to further test the resiliency of large banks, the result of which will likely be used to justify the removal of the buyback and dividend caps.