FED Issues Update on Bank Dividend and Share Repurchase Restrictions
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
FCA Issues Update on Tailored Support Guidance Amid Ongoing CrisisRelated Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
EP Reaches Agreement on Corporate Sustainability Reporting Directive
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
PRA Consults on Model Risk Management Principles for Banks
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
EC Regulation Amends Standards for Calculating Credit Risk Adjustments
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
UK Authorities Issue Regulatory and Reporting Updates for Banks
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
BCBS Issues Climate Risk Principles while HKMA Expresses Its Support
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.
