Senators Warren and Schatz call on Fed to suspend bank dividends, increase transparency

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Senators Elizabeth Warren (D-Mass.) And Brian Schatz (D-Hawaii) urge Federal Reserve officials to suspend bank dividends and provide more transparency on how the Fed measures banks’ ability to weather a crisis, according to a letter provided exclusively to Morning Consult.

Warren and Schatz, both members of the Senate Banking Committee, said in a letter on Tuesday evening sent Fed Chairman Jerome Powell and Fed Vice Chairman for Supervision Randal Quarles that their concerns are “particularly worrisome” after a report that Senate Banking Committee Chairman Mike Crapo (R-Idaho) is working on legislation that would allow banking regulators to exclude certain items from their balance sheets when determining capital requirements, thereby allowing banks to accept riskier assets.

The legislation was not incorporated into the Senate’s latest Republican coronavirus stimulus package, but it could still be included in subsequent negotiations and inserted into the final bill, according to two people familiar with the matter.

In June, when the Fed announced stress test results, the central bank suspended share buybacks and capped dividend payments – but kept blocking them altogether – for the biggest banks. from the country. Several political experts, including Obama-appointed Federal Reserve Governor Lael Brainard, had urged the Fed to suspend bank dividend payments.

Not withholding dividends “is a serious mistake that could have serious consequences for financial stability in the midst of a severe recession,” wrote Warren and Schatz. “Banks should conserve capital to strengthen their capacity to withstand future losses and support lending to businesses and households. “

During stress tests, the Fed also looked at how the big banks would fare in a rapid recovery, a gradual recovery, and a W-shaped recovery after the coronavirus pandemic. The central bank has only released aggregate information, rather than providing data for individual banks, and has asked all banks to resubmit their capital plans taking into account the fallout from COVID-19.

Senators also criticized the Fed’s decision to use the results of its stress test, the scenarios of which were announced in February, long before anyone knew how badly the pandemic would hurt the economy.

“These analyzes and actions that the Fed has taken on the basis of their results are incomplete, insufficient and lack the transparency and analytical rigor necessary to understand and deal with the risks of this pandemic for financial security,” the letter said. .

Democratic senators have asked the Fed to release a list of data to the public by August 11, including estimated changes in all capital ratios for individual banks in different coronavirus scenarios, not just overall , and insisted on whether the Fed found any problems in planning a bank’s capital.

“Transparency is a fundamental pillar of post-crisis stress testing,” the letter said. “It is essential to ensure public confidence in the banking system and to ensure that policymakers and analysts have access to all the information necessary to deal with the current health and economic crisis. ”

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