The results of the Federal Reserve’s annual stress tests done last week on some of the largest banks in the U.S. came in on Monday and the financial sector rallied amid the news, with some financial ETFs climbing nearly 4%.
Investors were concerned prior to the announcements that any of the six-largest banks would be required to slash their quarterly dividends to meet the Fed’s rigid capital requirements, put in place to stymie a widespread financial disaster that might occur in the midst of a severe economic downturn.
While the industry swiftly relinquished equity buybacks at the commencement of the coronavirus pandemic, banks are hesitant to cut their dividend payments, which are viewed as a steady source of income and an inducement for investors. The industry was required to cut dividends following the 2008 financial crisis and has only gradually shored them up since the Fed first permitted banks to raise dividends in 2011.
But in light of the tremendous stress that the coronavirus pandemic has placed on the American economy, the Fed last week announced new restrictions on the U.S. banking industry.
In an attempt to ensure the survival of the banks and establish adequate capital in the system, the Fed explained it is limiting dividend payments in the third quarter. The central bank explained that third-quarter bank dividends will be capped at the amount paid in the second quarter and that it may elect to limit the payouts further based on each firm’s recent earnings.
Clearly concerned, the Fed also prevented the banks from purchasing back shares in the third quarter, claiming it will force banks to submit to ongoing quarterly reviews as long as the crisis remains. Most of the nation’s largest banks already said they would stop share repurchases during the second quarter to build up their