Fed extends limits to stock buybacks and dividends for biggest banks through 2020

Federal Reserve
A person walks by the Federal Reserve on Saturday, April 25, 2020.

  • The Federal Reserve extended its limits on stock buybacks and dividends for the nation’s largest banks through the rest of 2020.
  • Firms with more than $100 billion in total assets will be kept from initiating new repurchase programs and must keep dividends below their second-quarter levels, the central bank announced on Wednesday.
  • The extension was made “due to continued economic uncertainty” and is meant to buttress banks’ cash reserves during the virus-induced slump.
  • The constraints were first announced in June.
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The Federal Reserve lengthened its caps on share buybacks and dividend payments for the US’s largest banks through the rest of the year.

Firms with more than $100 billion in total assets will be kept from starting new repurchase programs, and dividend payments will be limited by a formula based on recent income, the central bank said in a Wednesday press release. The extension was made “due to continued economic uncertainty from the coronavirus response,” and is meant to bolster banks’ balance sheets to ride out the downturn.

Cash reserves at large banks “remained strong” during the third quarter while the dividend and buyback caps were in effect, the Fed added.

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The decision is sure to rankle large banks and their shareholders. Several of the affected firms indicated in the third quarter they plan to resume regular dividend payments and buybacks once the Fed’s limitations are lifted.

The central bank first unveiled the constraints in June, limiting affected firms from paying out dividends larger than those seen in the second quarter. The Fed plans to hold a stress test later in the year to further probe banks’ capital resiliency. 

Fed Governor Lael Brainard dissented in the 4-1 vote for extending the caps through 2020. She indicated in a June 25 statement that allowing dividend payments to continue in any form risks banks curbing the spread of credit.

The Wednesday decision comes amid a calm period for the Fed relative to the start of the virus recession. The Federal Open Market Committee maintained near-zero rates at its September meeting and issued forward guidance for future rate hikes. The Fed’s pace of asset purchases held steady.

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