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March 24, 2020

As the Federal Reserve Floods the Financial System with Capital, It Must Order Large Banks to Stop Capital Distributions via Stock Buybacks and Dividends

FOR IMMEDIATE RELEASE
March 24, 2020
Contact: press@bettermarkets.com

Washington, D.C.  –  Dennis M. Kelleher, President and Chief Executive Officer of Better Markets, issued the following statement regarding the need for the Federal Reserve to order banks with assets greater than $100 billion to stop all capital distributions and to revoke two counterproductive rule changes enacted in the last week:

“It is crazy for the Federal Reserve to be injecting capital and other support into the financial system to help the economy while at the very same time the recipients of that support are depleting their own capital by stock buybacks and dividends.  U.S. banks with more than $100 billion in assets ejected $200 billion in capital in 2019 this way and can be expected to do the same in 2020 unless stopped, which the Federal Reserve must make them do now.  This is critically important because these banks account for more than 70% of bank lending to the U.S. economy and capital depletion via stock buybacks and dividends reduces their ability to do that.

“We applaud the Federal Reserve moving quickly, creatively and forcefully to support U.S. financial markets and the economy in response to the widespread coronavirus-created uncertainty the country faces.  Those actions provide unprecedented amounts of liquidity and capital to the financial system to ensure that the banking system can support the economy.  However, the Federal Reserve must now demand that all U.S. banks with more than $100 billion in assets preserve the capital they already have to increase their ability to support lending to households and small businesses.

“While we also applaud the eight largest banks for recently announcing that they would voluntarily but conditionally suspend stock buybacks in the second quarter, that at best only partly addresses the capital depletion problem.  With the pandemic-created crisis and the Federal Reserve’s unprecedented actions, all U.S. banks with more than $100 billion in assets simply must use all available resources to strengthen their financial positions and that means immediately stopping all such distributions.

“In addition, the Federal Reserve must revoke two counterproductive rule changes it made in the past week.  The Federal Reserve changed a capital rule and the TLAC rule, which would delay regulatory limitations on banks’ capital distributions in the face of rapid deterioration, allowing banks to keep returning scarce capital to shareholders even as earnings decline precipitously.  These rule changes were a mistake and should be revoked, in addition to ordering the halt of all capital distributions. 

“Combined, these actions would put the large U.S. banks in a much stronger position to survive the downturn and continue to support the economy.  That is key because, during the early stages of the 2008 financial crisis, U.S. banks continued to return vast amounts of capital to shareholders only to then require massive taxpayer-funded government bailouts. The Federal Reserve must act now to prevent that from happening again.”

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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.com

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