The Fed put new restrictions on US banks. Some want it to go further
June 26 , 2020
By Julia Horowitz, CNN Business

London (CNN Business) Regulators have made clear that the US banking system is in much better shape than it was during the 2008 financial crisis, and should have enough money on hand to keep lending to customers in support of the economic recovery.

But new restrictions announced by the Federal Reserve underscore the uncertainty of the outlook due to the coronavirus pandemic, with the United States recording a daily high for new cases Thursday amid a surge of infections in states like Texas, California and Florida. What's happening: The Federal Reserve will require all large banks to suspend share buybacks in the third quarter and will cap shareholder dividends to the amount paid in the second quarter, moves intended to preserve capital, my CNN Business colleague
Anneken Tappe reports.

All large banks will also have to resubmit their capital plans later this year to reflect the impact of coronavirus.

"The banking system has been a source of strength during this crisis," Vice Chair Randal Quarles said in a statement. The goal, then, is to keep it that way.

The Federal Reserve's announcement accompanied its annual stress test, a post-Great Recession effort that runs through adverse scenarios to ensure the health of the banking system.

This year, the Fed also tested how banks would fare in three different recession scenarios: a V-shaped, U-shaped and W-shaped recession and recovery. The central bank found that under its most severe scenarios, losses from bad loans would range from $560 billion to $700 billion. It did not release results by individual bank.

What it means: The Fed said that even under the most dire circumstances examined, banks "could continue lending to businesses and households, due to the substantial buildup of capital since the financial crisis." Still, there's enough ambiguity about the economic outlook for the central bank to feel it needed to intervene.

Some think the Fed should have gone further, banning dividends outright.

See here: "The banking system will face increasing stress as the pandemic and the related economic disruption continue, and businesses and households face challenges meeting their financial obligations," Democratic Senators Elizabeth Warren, Sherrod
Brown and Brian Schatz said in a letter to Quarles and Fed Chair Jerome Powell this week. "Now is the time to suspend capital distributions across the board to bolster the loss-absorbing capacity of big banks."

One of the Fed's governors, Lael Brainard — who was confirmed under President Barack Obama — also objected to the fact that banks can continue shareholder payouts.

Investor insight: The KBW Bank Index rose 3.3% Thursday after financial regulators said Thursday they plan to make it easier to let banks invest in venture capital funds and relax some limitations on derivatives trading. But shares fell after hours following the Fed announcement.
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