Updated: September 28, 2022
US Senator Brian Schatz (D-Hawai‘i) led a group of senators in calling on the Federal Reserve (“the Fed”) to require banks to suspend dividend payments to shareholders as the economy struggles to recover from the ongoing COVID-19 crisis.
The senators urged Fed Chair Jerome Powell and Vice Chair Randal Quarles to ensure banks conserve capital now so that they can continue lending if the economic fallout from the pandemic turns more severe.
“The banking system will face increasing stress as the pandemic and the related economic disruption continue, and businesses and households face challenges meeting their financial obligations. Now is the time to suspend capital distributions across the board to bolster the loss absorbing capacity of big banks,” the senators wrote.
Backers say that as families and businesses struggle to pay their bills and repay loans because of the economic disruption from the pandemic, the banks that hold those loans will face steep losses. By paying shareholder dividends, banks are reducing the amount of capital they have to cover those loses.
“Our economy needs a safe and sound banking system to serve as a source of strength through these difficult times,” the senators continued. “An undercapitalized banking system could seriously hinder the economic recovery if this crisis causes a wave of bank failures. You should be taking every step possible to avoid that scenario.”
The Fed will soon release the results of its annual bank stress tests, which were created before the pandemic and do not account for the economic trajectory going forward. The Fed is conducting COVID-related sensitivity analyses, but the senators note that the results of these analyses will not be used to determine if banks need more capital, even if they fail.
In addition to Schatz, the letter was signed by U.S. Senators Sherrod Brown (D-Ohio) and Elizabeth Warren (D-Mass.). The full text of the letter to Chairman Powell and Vice Chair Quarles is available here.