The US Central Bank on Thursday announced new restrictions on how the country’s largest banks spend capital to protect the financial system from the economic risks posed by the Covid-19 pandemic.
Concretely, it prohibited the 34 largest banks in the country, including JPMorgan, Wells Fargo and Bank of America, from carrying out share buyback programs in the third quarter. It also orders them to limit the payment of dividends to shareholders, she said in a statement.
Also read: The Fed is doing everything to reassure the world economy
This decision, a first since the Great Recession, follows the bank stress tests, the results of which were published on Thursday.
@federalreserve results of coronavirus tests show large banks would suffer large losses but still stay above their minimum requirements. But because of economic uncertainty, Fed is taking several actions to ensure banks remain resilient: https://t.co/p2DaDsvsgF
— Federal Reserve (@federalreserve) June 25, 2020
–
Three scenarios analyzed
In addition to the usual tests, the powerful American financial institution indicates that it has carried out “additional sensitivity analyzes in the light of the coronavirus event”. The aim was to assess their resilience in the context of three hypothetical recessions, or downward scenarios, which could result from the impact of the pandemic.
The scenarios included a recession and a sustained V-shaped recovery; a recession and a slower recovery, called a U-shaped; and a recession in W with a double recession. In the three bearish scenarios, the unemployment rate peaked between 15.6% and 19.5%, significantly more than in the stress test scenarios carried out before the pandemic.
In addition, “overall, the 34 banks’ loan losses ranged from $ 560 billion to $ 700 billion in the sensitivity analysis and overall capital ratios fell from 12.0% in the fourth quarter of 2019 at between 9.5% and 7.7% “in the scenarios envisaged, details the Federal Reserve. However, it stresses that these scenarios “are not predictions or forecasts of the likely trajectory of the economy or the financial markets”.
Read the article of June 28, 2019: Credit Suisse Passes Fed Testing, But Conditionally
Additional analysis scheduled every quarter
The Central Bank nevertheless asked the banks to reassess their longer-term investment plans. All major banks will have to resubmit “their plans later this year to address current tensions” to help companies reassess their capital needs during this period of uncertainty.
The Fed says it will do additional analysis every quarter to determine if adjustments are needed.
Also read: Central banks called to calm the effects of the coronavirus
The annual stress tests had been implemented by the Dodd-Frank law after the 2008 financial crisis. They aim to determine whether these American banking groups and subsidiaries of foreign banks, present systemic risks in the event of a crisis and s ‘they have enough cash.
–
