The Federal Reserve announced a decision to extend its control measures for large banking entities by another quarter on Wednesday, emphasizing the need for capital preservation in the sector.
What Happened: Banking entities with a total asset base greater than $100 billion will remain prohibited from entering into a share buyback program. The Fed also extended the imposition of a cap for dividend payments by linking the dividend allocation to recent income.
The restrictions are meant to ensure the continued preservation of bank capital, while supporting lending and providing a cushion against contingencies like losses on loans, according to the Fed.
The annual stress test results released in June noted that the banking entities would suffer heavy losses, based on hypothetical scenarios, but be able to withstand the economic setback, nevertheless.
Several Democratic lawmakers, including Senator Elizabeth Warren (D-Mass.), have long demanded that bank dividend payments be banned completely.
Why Does It Matter: In mid-March, members of the Financial Services Forum decided to curtail buybacks, according to CNBC.
Established banks like JPMorgan Chase & Co (NYSE: JPM), Bank of America Corp (NYSE: BAC), Goldman Sachs Group Inc (NYSE: GS), Citigroup Inc (NYSE: C), and Wells Fargo & Co (NYSE: WFC) are part of the forum.
After the Fed released the capital preservation guidelines in June, Wells Fargo had to reduce its Q3 dividend payouts, CNBC reported.
What's Next: A second stress test and sensitivity analysis are underway and results would be released by the end of the year.
Photo courtesy: Adam Fagen via Flickr
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