Fed will extend freeze on stock buybacks, cap on dividends

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WASHINGTON — The Federal Reserve is extending its ban on stock buybacks for banks with more than $100 billion of assets into the fourth quarter and will cap dividend payments using a formula based on recent income.

The move will “ensure that large banks maintain a high level of capital resilience,” the Fed said Wednesday in a news release.

It mirrors one the central bank took in June after conducting its annual stress tests, which found that each of the 34 banks tested were generally able to maintain the minimum capital requirements under hypothetical economic recoveries from the coronavirus pandemic, although several breached the minimum in the most severe scenario.

Federal Reserve Gov. Lael Brainard dissented against the Fed's moves Wednesday. She has said she doesn't oppose the stock-buyback ban or the dividend limit, but that tougher action is necessary.

The Fed had restricted share repurchases during the third quarter, and it had limited dividend distributions to the levels banks paid out in the second quarter or the average of the last four quarters, whichever was less.

“The capital positions of large banks have remained strong during the third quarter while such restrictions were in place,” the Fed said.

Fed Gov. Lael Brainard voted against the action. Her reason was not immediately available, but Brainhard had voted against the Fed’s similar decision in June, arguing that while she agreed with the agency’s move to limit stock repurchases and dividend payouts, even more dramatic actions were likely warranted.

The Fed is holding the first-ever "midcycle" stress test to get a firmer grasp of banks' capital strength since onset of the coronavirus pandemic, with the results of those tests expected by the end of this year.

The most recent results of the Fed's normal test were based significantly on year-end 2019 financial data, while the supplemental tests will use data from this year's economic shock and could be used to make a decision on dividend payments and share repurchases for the first quarter of 2021.

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Federal Reserve Stock dividends Capital requirements Lael Brainard Stress tests COVID-19