US banks told to suspend buybacks, limit dividends

US bank shares sank after the Fed ordered 34 major institutions to suspend share buybacks and limit dividend payments.

JPMorgan Chase shares were among those to fall after the Fed announcement. Picture: AFP

The Federal Reserve has ordered 34 major US banks to suspend share buybacks in the third quarter and limit dividend payments to shareholders.

The decision is the first such move since the global financial crisis 12 years ago, and limits how banks can spend their capital amid the coronavirus pandemic that has caused a sharp economic downturn.

Bank stocks sank in after-hours trade following the announcement, which came as the US central bank revealed the results of its banking system stress tests for the year, along with additional checks in light of the pandemic.

JPMorgan Chase & Co was trading 1.5 per cent lower in post-market action, while American Express fell 1.1 per cent, Bank of America lost 2.6 per cent lower, Goldman Sachs was off 2 per cent and Morgan Stanley shed 2.1 per cent.

Bank stocks had risen earlier after the Fed finalised a rule that will ease restrictions curtailing the ability of banks to make investments in such areas as hedge funds.

Following the release of the stress tests, the Fed said: “For the third quarter of this year, the board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income.”

The stress test results varied depending on the severity of the downturn modelled, but Fed Vice Chair Randal Quarles said the outcomes were generally positive.

“The banking system has been a source of strength during this crisis, and the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks,” Mr Quarles said in a statement.

However the Fed noted that in some of the more severe scenarios, “most firms remain well capitalised but several would approach minimum capital levels.”

“All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms reassess their capital needs and maintain strong capital planning practices during this period of uncertainty,” the Fed said, in addition to announcing the new rules on buybacks and dividends.

Share repurchases have represented about 70 per cent of payouts to shareholders from large banks in recent years, the Fed noted.

The central bank rolled out trillions of dollars in liquidity to stop financial markets from seizing up as the coronavirus forced businesses to close in mid-March, sending unemployment up to 13.3 per cent in May.

AFP