Fed to Weigh Bank Dividends After Ending Covid Capital Break

The Federal Reserve may have little reason to continue restricting bank dividends now that it’s ended a pandemic-driven capital break for Wall Street.

In the face of Covid-19, the regulator had banned stock buybacks and limited the dividends at the biggest banks, saying the industry needed to build a cushion against the losses expected during the economic crisis of the last year. The central bank already let the banks re-start buybacks, but it continued to constrain dividends. Now, the Fed is saying the industry has plenty of capital, which raises questions about what’s next with that dividend limit.

Chairman Jerome Powell said this week that his agency hasn’t yet made a decision on what to do, and that an announcement is “a couple of weeks away.” But the current dividend limit is set to expire at the end of the month, so the Fed is under some pressure to make up its mind.

With the Fed’s Friday announcement that the temporary capital boon it gave banks is over on March 31, officials said the biggest lenders have about $200 billion more in capital than they need to stay below their maximum leverage caps. Because of that, the officials said they didn’t expect banks would have to do anything drastic in returning to their usual capital requirements.

“This takes out of play the biggest political impediment to the Fed removing all Covid-19-related restrictions on big bank capital distributions,” Jaret Seiberg, an analyst for Cowen & Co., wrote in a note. The Fed could revert to letting banks get back to regular capital-distribution practices this year, he predicted.

Still, the dividend question has drawn heat from Democratic lawmakers, including Senate Banking Committee Chairman Sherrod Brown and Senator Elizabeth Warren, who have called for the Fed to keep demanding the industry keep building up its safety cushion until the Covid crisis is firmly in the past.

Brown said in a statement that ending the break is “a victory for lending in communities hit hard by the pandemic,” and that he would keep pushing regulators “to prioritize the real economy over stock buybacks and dividends.”

©2021 Bloomberg L.P.

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