The industry performed well in annual
The Fed “is taking action to assess banks’ conditions more intensively and to require the largest banks to adopt prudent measures to preserve capital in the coming months,” Fed Vice Chairman for Supervision
The Fed capped dividends at second-quarter levels and said future payouts would be limited by a formula based on recent earnings.
There’s still a chance Wells Fargo can continue paying a dividend. Assuming its second-quarter income is as low as in the first three months of the year, its average for the past four quarters would be $2.2 billion, higher than the $2.1 billion the bank paid in dividends in the first quarter.
Goldman, Morgan Stanley
Both firms were expected to do worse than other banks because their businesses are more reliant on capital markets, which take a heavier beating in the regulator’s crisis scenario.
Representatives of Goldman Sachs and Morgan Stanley declined to comment on the stress tests, and Wells Fargo said it had no immediate comment.
The central bank is also requiring banks to re-submit capital plans later in the year, a move unprecedented in the past decade of Fed testing. Quarles said the board “will use this information to make a further assessment of the banks’ financial conditions and risks.”
Shares of Goldman Sachs were down more than 4% in extended trading in New York at 5:24 p.m. and Well Fargo slumped 3.5%. Morgan Stanley was virtually unchanged.
‘Not Too Harsh’
Analysts weren’t expecting buybacks to resume any time soon or that any bank would be able to boost dividends. Keefe, Bruyette & Woods said
“This is not as drastic as it sounds as dividends are basically being preserved and buybacks were off the table anyway,” said
The sensitivity analysis sought to capture how financial firms are positioned to handle financial pressure caused by the pandemic. Those results were only released in aggregate form, showing how all the 34 banks being tested would fare under more severe scenarios.
Policy makers considered three potential scenarios. Results from the quick-recovery, V-shaped outcome echoed those of the regular stress tests, with the aggregate capital level of the firms dropping by 2.5 percentage points versus 2.1 in the analysis that didn’t take into account the pandemic.
But a slower recovery would mean a much harsher impact, with the group’s capital declining 3.9 percentage points in the U-shaped rebound and 4.3 percentage points in the longest, W-shaped scenario, which assumes a second wave of coronavirus containment measures.
“Despite the substantial likelihood that banks will need larger capital buffers to absorb losses under plausible scenarios, the authorization permits distributions that will deplete capital buffers,” Brainard said in a separate statement.
In the past, the nation’s largest banks would disclose their buyback and dividend targets for the next 12 months within minutes of the Fed’s announcement of stress test results. But this time, policy makers asked them not to release capital-distribution plans until Monday.
Immediate decisions on distributions aren’t possible anyway because of changes to the exam. For one, capital plans are no longer directly approved by the Fed during the stress test. Instead, regulators assign each company a “capital buffer” based on their performance in the review. Each bank then has the freedom, without prior Fed approval, to distribute cash to shareholders as long as they stay within required minimums.
Adding another layer of complexity to the calculation was the addition of the side tests related to the impact of the pandemic. Bank officials are seeing those results for the first time Thursday, and will need time to adjust their payout targets before making them public.
The stress tests, begun in 2009 as a tool to help avoid another financial crisis, examine the biggest banks’ ability to weather extreme economic downturns without the need for government bailouts. They have been the single most important factor determining how much capital Wall Street banks need to ward off another disaster.
In a letter earlier this week, Democratic senators including
The largest U.S. lenders suspended buybacks in March until the end of the second quarter to conserve capital for the pandemic. Analysts aren’t expecting them to resume until the middle of next year.
(Updates with analysts’ comments starting in 11th paragraph, adds share prices in 12th.)
--With assistance from
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