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25 June 2020 By Gina Chon Follow @GinaChon

The biggest lenders would have a minimum capital ratio of 7.7% in a W-shaped virus recovery, the U.S. regulator reckons. The Fed is capping dividends as some banks approach the danger zone. Still, it reassures that after a decade of reforms, they can weather an unforeseen crisis.

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Thirty-three of the largest banks overseen by the U.S. Federal Reserve passed the 2020 stress test that assesses how they would fare in hypothetical crises, the regulator said on June 25. But it also said that their dividend payouts would be restricted until at least the end of September.

The severely adverse scenario that the Fed uses envisages the U.S. unemployment rate rising by 6.5 percentage points to 10%. To account for Covid-19, the Fed also conducted a sensitivity analysis based on three scenarios for a post-pandemic recovery, including one with unemployment of 19.5%.

The largest firms in the industry in aggregate had a minimum Tier-1 common equity capital ratio of 9.5% in a V-shaped recovery, 8.1% in a slower U-shaped trajectory and 7.7% in the W-shaped scenario that imagines a winter resurgence of the coronavirus.

The Fed said that banks couldn’t increase dividends in the third quarter beyond the previous quarter’s level, and payouts could not exceed average earnings for the previous twelve months.

They also are prohibited from implementing share buybacks in the July-to-September quarter. Many large banks including JPMorgan and Bank of America had already suspended their share buyback programs until the at least the end of June.

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The Fed said that banks couldn’t increase dividends in the third quarter beyond the previous quarter’s level, and payouts could not exceed average earnings for the previous twelve months.

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