Federal Reserve bans share buy back at big banks

The Federal Reserve said Wednesday that it will extend its ban on share buybacks at the largest U.S. banks, although banks will still be allowed to pay out dividends.

The Fed said in a statement that the measures are “to ensure that large banks maintain a high level of capital resilience.”

In late June, the central bank completed its annual stress tests and concluded that the country’s 33 largest banks appeared to have enough cushion to deal with a harsh economic downturn. But the regulator banned share buybacks for the third quarter as a precautionary measure.

In that decision, the Fed continued to permit dividend payments but only up to a cap (either the amount paid in the previous quarter or the quarterly average of income made over the last four quarters, whichever is less).

The Fed’s announcement Wednesday extends the buyback ban and maintains the cap on dividend payments into the fourth quarter of this year.

The decision to extend the share buyback and dividend limitations through the fourth quarter was agreed to by four of the five members of the Federal Reserve’s Board of Governors. Lael Brainard, who also dissented against the action in June, dissented against the decision Wednesday.

Brainard had argued in June that she would have liked to see a ban on dividend payments entirely, arguing at the time that allowing distributions of any sort “raises the risk they will need to tighten credit or rebuild capital during the recovery.”

The Fed had left open the possibility that it would extends its capital distribution restrictions, but some banks were still hopeful they could resume buybacks by the fourth quarter. JPMorgan Chase (JPM) CFO Jennifer Piepszak said Sept. 15 she “wouldn’t rule out share buybacks” if regulators permitted it in the fourth quarter.

The announcement comes as the Fed undergoes a second stress test, which policymakers launched in an effort to provide a second look at banks through this unprecedented COVID-19 crisis.

The Fed said Wednesday the results from that second stress test will be released “by the end of the year.”

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance.


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