The Federal Reserve has announced new restrictions on the US banking sector, extending the ban on stock buybacks and preventing dividend increases until the end of the third quarter at the earliest.
The move follows the leading central banks’ annual stress tests, in which American banks generally performed well. The assessment also found that under certain Covid-19 pandemic scenarios, a number of banks would approach minimum capital levels.
Vice chairman for supervision Randal Quarles stated: "The banking system has been a source of strength during this crisis. The results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks."
Nonetheless Quarles maintained that the Fed was “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. The banking system remains well capitalised under even the harshest of these downside scenarios.”
Capping dividends at second-quarter levels limiting future pay-outs via a formula based on recent earnings, the Fed also asked banks to “re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty”.
A move unprecedented in the past decade of the central bank’s testing regime, Quarles stated that the information will be used “to make a further assessment of the banks’ financial conditions and risks”.
Although it closed Thursday up by almost 4.6 per cent, Goldman Sachs shares fell by 3.6 per cent in pre-market Friday trading. Wells Fargo followed a similar path, closing up 4.79 per cent, but down 3.7 per cent before the opening bell.