Wall Street banks should brace for their dividends to be influenced by adjustments to the annual stress tests that the Federal Reserve made due to the coronavirus pandemic, Fed Vice Chairman for Supervision Randal Quarles said Friday.
The exams help the Fed set the most important capital demands imposed on the largest U.S. lenders — and they are instrumental for banks in setting shareholder dividends. While the tests have produced fewer shocks in recent years than in the period when they were initiated after the 2008 financial meltdown, next week’s results could see drama as the first to be calculated while a real crisis is raging.
“We simply would not have been doing our jobs if we had just run the test using a scenario framed before the economy began to deteriorate in March,” Quarles said in remarks set to be delivered Friday in an online event hosted by Women in Housing & Finance.
Though the Fed didn’t have time or data to run a “complete and updated” Covid-19 stress test, Quarles said, it did amplify some key parts of the existing scenarios.
“This sensitivity analysis has helped sharpen our understanding of how banks may fare in the wide range of possible outcomes,” Quarles said in his prepared remarks.
While the banks’ main capital targets will be set in the normal way, according to existing rules, he said, the separate pandemic analysis has been conducted by Fed staff to get a sense of how lenders may be weathering the pandemic depending on a few different potential paths for the current recession.
“We will use the results of our sensitivity analysis to inform our overall stance on capital distributions and in ongoing bank supervision,” he said.
The banks will be directed to look at their individual results and come up with announcements on their capital plans — including dividends — by the end of the day on June 29, according to a footnote in Quarles’ speech.