Banking and Finance Law Daily Senate Banking members call Fed’s failure to suspend dividend payments a ‘grave error’
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Thursday, July 30, 2020

Senate Banking members call Fed’s failure to suspend dividend payments a ‘grave error’

By J. Preston Carter, J.D., LL.M.

Senators Warren and Schatz urge the Fed to limit bank dividend payments and maintain capital requirements in light of recent bank sensitivity analyses.

In a letter to Jerome H. Powell, Chairman of the Federal Reserve Board, and Randal K. Quarles, the Fed's Vice Chairman for Supervision, Senate Banking Committee members Elizabeth Warren (D-Mass) and Brian Schatz (D-Hawaii) express "serious concerns about the Fed's opaque decision making and its failure to take the necessary steps to keep our banking system stable" in light of the COVID-19 pandemic and recent reports of bank vulnerability. According to the letter, their concerns "are especially disturbing in the context of recent reports that the Fed is urging Congress to give regulators the authority to roll back critical capital requirements that were put in place to keep our financial system stable after the last financial crisis."

The lawmakers referred to the 2020 Dodd-Frank Act stress tests, announced in February, to which the Fed later added three additional "sensitivity analyses" to examine how banks could fare in three hypothetical economic scenarios stemming from the pandemic-driven downturn in order to help inform decisions on the banks' capital distributions (see Banking and Finance Law Daily, June 26, 2020). The letter states that results of the Fed's "W-shaped" recovery scenario, the most severe of the three, "painted a deeply concerning picture of the banking system's present ability to absorb potential losses."

However, the lawmakers express concern that, unlike with the normal stress tests, the Fed did not release the results of this scenario for individual banks and failed to include the effects of the different scenarios on a number of important metrics. As a result, "the Fed is depriving policymakers and the public of crucial information about the health of the banking sector," according to the senators’ press release.

"Despite these troubling results," the senators wrote, "the Fed inexplicably announced that it would not suspend dividend payments. Instead, banks are allowed to continue paying their dividends, albeit at a capped amount calculated by looking backward to banks' previous net income—contradicting the forward-looking purpose of a normal stress test. The failure to take this action is a grave error that could have serious consequences for financial stability amidst a severe recession. Banks should be conserving capital to bolster their ability to withstand future losses and to support lending to businesses and households."

The senators urged the Fed to reverse the decision to allow banks to continue to pay their dividends and immediately provide more information to the public about the current risks to the banking sector, including additional findings from the sensitivity analyses the Fed has failed to release. They requested a response no later than Aug. 11, 2020.

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