Fed halts dividend hikes, buybacks; regulators vote to relax Volcker Rule

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Stressed, but not critical

The Federal Reserve Thursday ordered the largest U.S. banks to “cap their dividends and suspend share buybacks to conserve funds” in the event of a “prolonged economic downturn” that could saddle them with up to $700 billion in loan losses. “The Fed said U.S. banks are strong enough to withstand the crisis and restricted dividend payouts and buybacks to make sure they stay that way,” the Wall Street Journal reported.

“Banks, which will announce their dividend plans for next quarter as soon as Monday, won’t be able to make payouts that are greater than their average quarterly profit from the four most recent quarters. The Fed also barred them from buying back shares in the third quarter. Most of the largest banks had previously agreed to halt buybacks during the second quarter.”

“The U.S. central bank stopped short of banning dividends — as European regulators have done during the crisis,” the Financial Times said. “It deferred decisions on future dividends until the fallout from the pandemic became clearer, spelling further uncertainty for bank investors.”

“The decision to limit payouts is an admission by the Fed that large financial institutions, while far better off than they were in the financial crisis, remain vulnerable to an economic downturn unlike any other in modern history,” the New York Times said. “Some of the Fed’s own loss projections for banks, in fact, suggest that the eventual hit to loans in a bad scenario could be far worse than in the aftermath of 2008.”

“Not all Fed board members thought regulators have gone far enough in reining in the banks,” the Washington Post reported. “Board governor Lael Brainard called on the Fed to block dividend payouts to shareholders during the third quarter, not just limit them.”

“I do not support giving the green light for large banks to deplete capital, which raises the risk they will need to tighten credit or rebuild capital during the recovery,” she wrote. “This policy fails to learn a key lesson of the financial crisis, and I cannot support it.”

“Goldman Sachs and most others are unlikely to have to reduce their dividends in the near term based on the Fed’s new stipulation,” the Journal said. “Of the six biggest banks in the U.S., only Wells Fargo looks likely to be affected immediately. Its dividend payouts in the third quarter were set to hit 150% of its average earnings over the prior four quarters,” compared with only around 41% at Goldman.

The actions are necessary in anticipation of more economic fallout from the coronavirus pandemic, the Fed said, American Banker’s Hannah Lang reports.

AML fine

Sweden’s financial supervisory authority fined Skandinaviska Enskilda Banken 1 billion Swedish kronor ($107.3 million) for failing to prevent money laundering at its Baltic branches.

Estonian regulators also fined it €1 million.

SEB is “the latest Scandinavian bank to be fined by regulators over weak anti-money laundering controls and governance in its Baltic operations, in a scandal that has hurt the image of northern Europe,” the FT noted. “Both Swedbank and Danske Bank, Denmark’s biggest lender which had its own €200bn money-laundering scandal, ousted their chief executives and chairmen over their dirty money problems.”

Wall Street Journal

Volcker rollback

Led by the Federal Deposit Insurance Corp., the U.S.’s main bank regulators “moved Thursday to roll back financial regulations that could free up tens of billions of dollars for major banks and allow them to invest more in venture-capital funds, delivering Wall Street one of its biggest wins of the Trump administration.” The regulators also agreed “to reduce the amount of cash that banks must set aside as collateral to cover potential losses on swap trades. Those restrictions were part of a broader set of regulations known as the Volcker rule.”

“Thursday’s decision scraps the part of a 2015 rule that requires banks to collect initial margin on over-the-counter swap transactions with their own affiliates. That provision had forced the 20 largest participants in the swaps market to set aside $44 billion as of 2019, according to a recent survey by the International Swaps and Derivatives Association.”

The FDIC action gave a boost to bank stocks. The KBW Nasdaq Bank Index rose 3.5% Thursday, “a sign investors welcomed the regulatory rollback.”

Ready for action

Retired Marine Corps Gen. Joe Dunford, the former chairman of the Joint Chiefs of Staff, “is the leading candidate to chair an oversight commission charged with monitoring the government’s $500 billion lending effort to combat the economic fallout from the coronavirus pandemic. The choice, made by House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell isn’t yet final,” as the general “is still being vetted.”

“The five-member panel he would oversee is charged with monitoring how the Treasury is distributing the $500 billion Congress provided to establish lending programs. Most of the funds are dedicated to backstopping losses in programs run by the Federal Reserve to support cities, states and businesses.”

Diversity dearth

“Leadership at the Federal Reserve’s 12 regional banks continues to suffer from a lack of racial, gender and economic diversity,” according to the Center for Popular Democracy’s Fed Up campaign.

“The Fed’s dearth of diversity at the quasi-private regional banks extends from their presidents to the boards of directors that play a role overseeing them,” the report from the “left-leaning” group said. “Of 108 directors now on the Fed boards, 77% are bankers or from business, 72% are white and just under 60% are male, in a system where 10 of the 12 regional bank presidents are white, and three are female. While some Federal Reserve regional banks have made modest progress in gender and racial diversity, board members from the business and banking sectors continue to dominate leadership positions,” the report said.

Financial Times

Watching the watchdog

The European Union’s financial regulator is calling “for a probe into whether BaFin, Germany’s banking regulator, failed in its supervision of Wirecard, warning that the payment company’s collapse poses a threat to investor trust in the EU.” Valdis Dombrovskis, the EU’s executive vice president in charge of financial services policy, told the FT that “the EU should be prepared to pursue a formal investigation into the German regulator for ‘breach of union law’ if the preliminary probe by the European Securities and Markets Authority discovered shortcomings in BaFin’s upholding of EU rules on financial reporting.”

In the U.K., the Financial Conduct Authority ordered Wirecard’s British subsidiary “to stop carrying out regulated activities, threatening to leave millions of customers temporarily unable to access money or make payments through fintech apps that rely on its technology.”

Hedge funds in the U.S. and the U.K. “are sitting on more than €1 billion of profits over the past week after their bets against Wirecard were vindicated by its dramatic collapse.”


“Banks have been under the regulatory thumb and that changed their profitability and trajectory. They’re probably marginally more valuable following this.” — Jason Brady, CEO of Thornburg Investment Management, commenting on the FDIC’s action to reduce Volcker Rule restrictions on bank investments in venture capital funds and swap trades.

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Federal Reserve Stress tests Stock dividends Penalties and fines AML Volcker Rule Diversity and equality Wirecard