18 Dec FRB – Releases second round of Bank Stress Test results
December 18, 2020 – FRB released the second round of bank stress test results and extended capital restrictions. Given the economic uncertainty that remained from COVID-19, and the condition of the US economy. Additional testing hypothetic series of COVID waves, unsynchronized for the US, and the world.
The second round found large banks kept strong capital levels in two recession scenarios.
Despite losses over $600 billion in both scenarios, reserve buildup in the first half of 2020 mitigated losses. Still, the FRB decided to extend current capital distribution restrictions, with modifications.
Relaxed Capital Restrictions
FRB extended current restrictions on distributions, with allowance for share repurchase. Restrictions will apply into the first quarter of 2021 and may be extended. Dividends and share repurchases are limited to amounts based on income in the past year. If the firm does not earn income, it will not be able to pay dividends or make repurchases.
US BHC Allowed Repayments
US BHC is now allowed to make certain capital distributions, in the first quarter of 2021. Pay common stock dividends and make share repurchases that, in aggregate, do not exceed an amount equal to average net income, for four preceding calendar quarters. The provided firm does not increase common stock dividends vs. level paid in Q2 of 2020. Except if average net income for the four preceding calendar quarters, does not exceed one cent per share, the firm may pay common stock dividends of one cent per share. Make share repurchase equal to share issuances related to expensed employee compensation. Redeem, make scheduled payments on additional tier 1 and tier 2 capital instruments.
Foreign Bank Payments
Foreign banks operating in the US, have different payout behavior than do domestic banks. Tend to pay a lump sum to parent, at the end of a year, instead of quarterly payments. FRB authorization is modified for US IHCs, to make distributions in the first quarter of 2021. May pay common stock dividends and make share repurchases if the aggregate paid in the final three quarters of 2020, and the first quarter of 2021, does not exceed the amount of net income the firm has earned, in the preceding four calendar quarters. Except if the average of firm net income for the four preceding calendar quarters does not exceed an amount equal to one cent per share, the firm may pay a dividend of one cent. Make share repurchase equal to share issuances re expensed employee compensation. Redeem, make scheduled payments on additional tier 1 and tier 2 capital instruments.
For more information, visit www.federalreserve.gov.