Fed suspends share buybacks and limits dividends for big banks after stress test results

• The Federal Reserve on Thursday imposed new restrictions on the US banking system after its annual stress test showed that some banks may approach minimum capital levels under certain coronavirus pandemic scenarios.
• Banks will be required to suspend share repurchases for the third quarter of the year, the central bank said in a statement.
• In addition, the board is also capping dividend payments and requiring large banks to re-submit and update capital plans later in the year to reflect current stresses.
• Read more on Business Insider.

The Federal Reserve imposed new restrictions on the US banking system Thursday after its annual stress test showed that some banks would approach minimum capital levels under certain coronavirus pandemic scenarios.

"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 Federal Reserve said in a statement.

In addition, the regulator is also requiring banks to re-evaluate their longer-term capital plans, it said. It's the first time since the financial crisis that the Federal Reserve has put new restrictions on the US banking system.

In the Fed's sensitivity analysis, loan losses for 34 banks could be as much as $700 billion under hypothetical downside scenarios in which unemployment remains high and the US economy doesn't swiftly bounce bank from the pandemic recession.

Under harsher scenarios, "most firms remain well capitalized but several would approach minimum capital levels," the Fed said.

The new restrictions come in light of these results. "The banking system has been a source of strength during this crisis," Vice Chair Randal K. Quarles said in statement, adding, "the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks."

Read more: A high-growth fund manager is tripling her peers' returns in 2020 while targeting non-tech industries like beer and restaurants. She breaks down how she picked out 5 of the most innovative companies.

The Fed said that all large banks will be required to re-submit and update capital plans later in the year to reflect current stresses. This will help firms "re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty," according to the central bank.

Going forward, the board will conduct additional analysis on a quarterly basis to determine if adjustments to the response are appropriate.