Federal Reserve Said US Banks Are Strong Enough To Survive Coronavirus
The Federal Reserve recently gave expanded stress tests (to study the effect of the downturn brought on by the coronavirus pandemic) and concluded the large US bank have sufficient cash to survive the pandemic. However, they warned that an extended economic downturn could find these banks holding hundreds of billions of dollars in losses on loans. It also mentioned it would allow the banks to restart share buybacks (under restricted amounts). It said it would continue to restrict dividend payouts.
The 33 largest U.S. banks tested could be hit with as much as $600 billion in loan losses.
When the pandemic was first hitting the US in a major way the Fed stopped all buybacks and said dividends couldn’t exceed a bank’s recent profits. The Fed in September extended the restrictions through the end of this year. On Friday, the Fed said the banks could restart making repurchases in the first quarter of 2021, but left the dividend restrictions in place. The aggregate dividends and repurchases can’t exceed the average quarterly profit from the four most recent quarters.
Randal Quarles, the Fed’s vice chairman of supervision, said the banking system “has been a source of strength during the past year.”
“Today’s stress test results confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy,” said Mr. Quarles.
The results released Friday reflect a second round of tests after the Fed required banks to resubmit updated capital plans to reflect the coronavirus crisis (HSBC Holdings PLC, was only one belowthe leverage requirements).
The big banks added more than $100 billion in loan-loss reserves, the Fed said. A key metric known as the common-equity Tier 1 ratio, which is a measure of high-quality capital as a share of risk-weighted assets, increased from 12% in the first quarter to 12.7% at the end of September for the largest lenders.