Fed should make banks stop paying dividends, Senate Democrats say

WASHINGTON — Ahead of the Federal Reserve’s anticipated announcement of banks’ stress test results, three Democratic senators are urging the regulator to require banks it oversees to suspend dividend payments in order to build their capital cushions while continuing to lend during coronavirus pandemic.

In a letter to Federal Reserve Chairman Jerome Powell and Vice Chairman of Supervision Randal Quarles, Sens. Sherrod Brown of Ohio, Elizabeth Warren of Massachusetts and Brian Schatz of Hawaii said the regulator should implement a broad dividend suspension in light of uncertainty about how much stress COVID-19 will continue to create for the sector.

Bloomberg

“An across-the-board suspension now, before heavy losses pile up, is the prudent course of action,” the senators wrote Tuesday. “Our economy needs a safe and sound banking system to serve as a source of strength through these difficult times. An undercapitalized banking system could seriously hinder the economic recovery if this crisis causes a wave of bank failures. You should be taking every step possible to avoid that scenario.”

Banks have faced growing pressure from congressional Democrats to suspend capital distributions in the midst of the coronavirus pandemic.

Quarles recently indicated that the Fed will use the outcome of coronavirus-related tests to determine whether banks can make dividend payments. Banks have remained largely bullish about their ability to continue paying dividends while holding adequate levels of capital.

The senators in their letter note that a number of former regulators, including former Fed Chair Janet Yellen and Federal Deposit Insurance Corp. Chairman Sheila Bair, have called on regulators to require banks to suspend capital distributions to shareholders and executives.

“It is not clear why the Fed has not taken this action yet,” the senators wrote.

The senators also criticized a decision by the Fed not to release bank-by-bank results of coronavirus-related sensitivity analyses and instead report potential losses across the tested banks.

“This decision could undermine confidence in the banking system,” the senators wrote. “If a bank fails any of the coronavirus-related severely adverse scenarios, it should be required to immediately raise capital to ensure it can handle potential future losses. Hiding the individual results and presenting only aggregate data will not make the possible capital shortfall go away.”