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July 29, 2020

Fed’s Stress Test Actions: Bank Failures, Bailouts More Likely

In late June, the Federal Reserve Board decided not to fully stop Wall Street banks from making capital distributions through dividend payouts, although they did put some “limitations” on dividend payouts. Dennis Kelleher, president and CEO of Better Markets, says this decision could lead to more bank failures and make taxpayer bailouts more likely.

On June 25, the Federal Reserve Board released the results of its stress tests for 2020 and additional sensitivity analyses that the board conducted in light of the coronavirus event. When releasing the results, Vice Chair Randal Quarles noted that the banking system “has been a source of strength during the crisis.” 

In a statement, Kelleher said that while the Fed correctly noted that the U.S. needs banks to be a source of strength during the crisis, it “failed to mention that these banks only entered the pandemic as strong as they were because the Dodd Frank Act and banking regulators forced them to build and maintain robust capital cushions and strong liquidity.”  

He added, “By allowing these capital distributions, on top of the other changes over the last three years, the Fed risks snatching defeat from the jaws of victory by needlessly weakening previously very effective stress tests. In the face of the current historically bad economic crisis and in light of the many dire warnings that the crisis could get much worse—including by the Chairman and other Governors of the Fed itself—these actions needlessly make bank failures and future taxpayer bailouts more likely. 

“The Fed should have learned the lessons from its needlessly self-inflicted wounds during the 2008 financial crisis when it allowed banks to continue to pump capital out to shareholders even as the crisis intensified, only to soon thereafter require massive taxpayer-funded support.” 

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