FED announced that the temporary and additional restrictions that are in place on bank holding company dividends and share repurchases will end for most firms after June 30, 2021 after completion of the current round of stress tests. Firms with capital levels above those required by the stress test will no longer be subject to the additional restrictions as of that date. However, firms with capital levels below those required by the stress test will remain subject to the restrictions. Results for this year's test will be released by July 01, 2021.
After two rounds of stress tests last year, FED found that large banks had strong capital levels, which provide a cushion against losses. However, due to economic uncertainty from the COVID event, FED put temporary and additional restrictions on capital distributions. Those restrictions limit bank dividends and share repurchases to an amount based on income over the past year. Normally, a large bank's capital distributions are restricted principally by FED's stress capital buffer, or SCB, framework. The SCB sets a capital target for each bank based on its individual stress test results, requiring the bank to hold at least enough capital to survive a severe recession. If a firm does not meet that target, automatic restrictions are imposed.
If a bank remains above all of its minimum risk-based capital requirements in this year's stress test, the additional restrictions will end after June 30, 2021 and it will be subject to the SCB's normal restrictions. However, a bank that falls below any of its minimum risk-based requirements in the stress test will remain subject to the additional restrictions for three extra months, through September 30, 2021. If the firm remains below the capital required by the stress test at that time, the framework of the regular SCB regime will impose even stricter distribution limitations. For a bank that is not subject to the stress test this year and on a two-year cycle, the additional restrictions will end after June 30, 2021 and its SCB requirements based on the June 2020 stress test will remain in place. Overall, the FED stress tests help ensure that large banks can support the economy during economic downturns. The tests evaluate the resilience of large banks by estimating their losses, revenue and capital levels under hypothetical scenarios over nine future quarters.
Related Link: Press Release
Keywords: Americas, US, Banking, Stress Testing, COVID-19, Dividend Distribution, Regulatory Capital, Basel, SCB, Stress Capital Buffer, Share Buybacks, FED
Previous ArticleFCA Issues Update on Tailored Support Guidance Amid Ongoing Crisis
The European Commission (EC) announced plans to defer the application of 13 regulatory technical standards under the Sustainable Finance Disclosure Regulation (2019/2088) by six months, from January 01, 2022 to July 01, 2022.
The Bank of England (BoE) published a consultation paper on approach to setting minimum requirement for own funds and eligible liabilities (MREL), an operational guide on executing bail-in, and a statement from the Deputy Governor Dave Ramsden.
The European Banking Authority (EBA) is seeking preliminary input on standardization of the proportionality assessment methodology for credit institutions and investment firms.
Certain regulatory authorities in the US are extending period for completion of the review of certain residential mortgage provisions and for publication of notice disclosing the determination of this review until December 20, 2021.
The Prudential Regulation Authority (PRA) published the policy statement PS18/21, which introduces an amendment in the definition of "higher paid material risk taker" in the Remuneration Part of the PRA Rulebook.
The European Banking Authority (EBA) published its annual report on asset encumbrance in banking sector.
The European Banking Authority (EBA) published a methodological guide to mystery shopping.
The Australian Prudential Regulation Authority (APRA) released a letter to authorized deposit-taking institutions to provide an update on key policy settings for the capital framework reforms, which will come into effect from January 01, 2023.
The Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published a report that assesses the business continuity planning activities of financial market infrastructures or FMIs.
The European Securities and Markets Authority (ESMA) has responded to the IFRS consultation on targeted amendments to the IFRS Foundation constitution to accommodate an International Sustainability Standards Board (ISSB) to set IFRS Sustainability Standards.