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(Adds investor comment and bank industry reaction)
By Pete Schroeder and David Henry
WASHINGTON/NEW YORK, June 25 (Reuters) - The U.S. Federal
Reserve announced on Thursday it will cap big bank dividend
payments and bar share repurchases until at least the fourth
quarter after finding lenders faced significant capital losses
when tested against an economic slump caused by the coronavirus
pandemic.
In its analysis, the Fed found that the country's largest
lenders have struggled to model the unprecedented downturn and
ensuing rescue programs, adding to already unprecedented
uncertainty about how banks and the economy overall would
perform in the coming months.
The Fed did not say how each bank fared under the pandemic
analysis, but found the 34 tested firms could suffer as much as
$700 billion in aggregate loan losses under the most severe,
"W-shaped" economic recovery.
Shares of banks including JPMorgan Chase & Co, Bank
of America Corp, Citigroup Inc, Wells Fargo & Co
and Goldman Sachs Group Inc tumbled in
after-hours trading on the news, having risen earlier in the
day.
The Fed determined that although banks could weather a
severe, tumultuous and prolonged economic downturn, several
would cut close to their minimum capital requirements.
With that in mind, the regulator placed a new limit on how
much capital banks could pay to investors in dividends in the
third quarter. They cannot pay more than they did in the second
quarter, and payments cannot exceed average net income over the
last four quarters.
The Fed also said it was barring share repurchases for at
least the third quarter. The biggest banks had voluntarily
suspended buybacks as the pandemic took hold, but it was not
clear how long that would last.
The Fed's actions were unprecedented. It was the first time
since the central bank implemented stress tests during the
2007-2009 financial crisis that it had to fundamentally alter
its annual exam for a dramatic economic swing.
After releasing some details in February, the Fed had to add
last-minute "sensitivity analyses" in May to account for actual
economic turmoil that exceeded the worst-case officials
envisioned in the original test.
The Fed's analysis suggested that some banks are more
vulnerable than others. In aggregate, banks saw capital levels
fall to 7.7% under the toughest scenario, but some came
dangerously close to the 4.5% minimum they are required to hold
to be considered well-capitalized.
Without naming any particular bank, the Fed said some relied
on "more optimistic than appropriate" outlooks and that their
capital planning "has not been thoughtful."
The biggest banks either declined to comment or did not
immediately respond to Reuters on Thursday evening.
The Financial Services Forum, an industry trade group, said
the results underscored the industry's strength. The group also
highlighted steps banks have taken to support the economy and
urged the Fed to be transparent in its process.
Banks privately received their specific results from the Fed
on Thursday. They can adjust original plans to get a better
assessment, and release those details after the market closes on
Monday.
Analysts and investors suggested the Fed's capital
limitations - though surprising - were not necessarily a bad
thing. Although banks had voluntarily suspended buybacks, they
were more reticent to limit dividends, and the Fed's
restrictions are forcing them to be cautious.
"It is worth being punished a little bit to ensure the
long-term viability of your investments," said Bill Smead, chief
investment officer of Smead Capital Management, whose fund owns
JPMorgan, Bank of America and Wells Fargo. "I'm not mad at (the
Fed)."
(Reporting by Pete Schroeder in Washington and David Henry in
New York
Additional reporting by Megan Davies
Editing by Lauren Tara LaCapra and Matthew Lewis)
