All foreign banks passed the test. In the past, the Fed had found deficiencies in the so-called qualitative part of the test at Deutsche Bank, but also at other foreign institutions, including “in the identification of risks to which the institutions are exposed, in the case of projected losses and earnings”, and in Capital planning processes, according to a Fed statement in Washington, released Wednesday afternoon (local time). However, the Fed had no objections this year. The foreign banks, which in addition to Deutsche Bank include the Swiss UBS and the British Barclays, “have improved their capital planning process,” the Fed said. US banks no longer had to undergo this qualitative part of the test.
With two tests passed in succession, Deutsche Bank will benefit from certain facilities next year. Banks that pass this hurdle will no longer have to publish whether they have passed the test or not. The bank will only discuss this with the Fed in the future. This is “an important step forward and shows that the transformation of our bank is on schedule,” wrote Riley and CEO Christian Sewing to their employees.
Fed Vice President Randy Quarles, who oversees banking supervision, praised the country’s largest institutions. Unlike in the financial crisis, the banking system this time is “not a burden, but a source of strength”. The central bank had been encouraged by the central bank to expand lending and tap its capital and liquidity reserves and had “worked with borrowers in these difficult times.” But given the severe recession in the United States and the economic uncertainties associated with the pandemic , the Fed announced a number of restrictions for the 33 financial institutions tested. So they are currently sufficiently capitalized. Still, the Fed urged them to conserve capital.
For example, the Fed is banning banks from resuming share buyback programs in the coming quarter. The six major Wall Street institutes voluntarily announced in March that the buybacks would be suspended until the end of June. According to the Fed, it is now too early to start again. The dividend payments are also to be restricted. The net profits of the second quarter, which ends at the end of June, are to be included in the decision, as are the profits of the previous three quarters. “The dividends cannot be increased or paid out if the banks do not earn enough,” said Quarles. The Fed expects some institutions to be in the red in the second quarter because they have to again make high provisions for possible credit defaults.
The top six US banks distributed 120 percent of their profits to shareholders last year in the form of share buybacks and dividends, around 70 percent of which came from buybacks.
Dispute over dividends
In addition, the banks will have to update their capital plans and resubmit them in the coming weeks. However, there is still no exact date for this. The original tests related to the balance sheet total from the end of December, and thus well before the corona crisis. However, the effects of the pandemic are now to be taken into account. The central bank also announced that it would review the situation of the banks every quarter and decide again and again whether share buybacks could be resumed or not.
However, the Fed decided not to cut dividends entirely. Former Fed chief Janet Yellen, former head of US deposit insurance, Sheila Bair, and other experts have called for this in the past few weeks. The European Central Bank had also prohibited banks from paying dividends. There, however, they are paid out only once a year, in the United States on a quarterly basis. The Fed saw this as a reason for greater flexibility. But there was also opposition to this decision within the central bank. Fed Governor Lael Brainard would have liked the dividend payments to be completely cut, as she said in a separate statement. She now sees “a high risk that banks will either raise fresh capital or have to cut back on lending,” she said.
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