Why Big Banks should suspend their dividends: Former FDIC chairman

Sheila Bair, Volcker Alliance director and former FDIC chairman, discusses her belief that Big Banks like JP Morgan, Goldman Sachs and Wells Fargo with the "Fast Money" traders. The Federal Reserve put new restrictions on the U.S. banking industry Thursday after its annual stress test found that several banks could get uncomfortably close to minimum capital levels in scenarios tied to the coronavirus pandemic. The Fed said in a release that big banks will be required to suspend share buybacks and cap dividend payments at their current level for the third quarter of this year. The regulator also said that it would only allow dividends to be paid based on a formula tied to a bank’s recent earnings. Furthermore, the industry will be subject to ongoing scrutiny: For the first time in the decade-long history of the stress test, banks will have to resubmit their payout plans again later this year, and restrictions on payouts could remain in effect. They may have to repeat this cycle every quarter, the regulator said. Bank stocks slumped after the close of regular trading in New York. Shares of Wells Fargo, which had climbed during the day, gave back some of those gains, falling 3.3%. Goldman Sachs slumped 3.9%. JPMorgan Chase dropped 1.9%. “While I expect banks will continue to manage their capital actions and liquidity risk prudently, and in support of the real economy, there is material uncertainty about the trajectory for the economic recovery,” Fed Vice Chair Randall Quarles said in a statement. “As a result, the Board is taking action to assess banks’ conditions more intensively and to require the largest banks to adopt prudent measures to preserve capital in the coming months.” The move signals that the unprecedented nature of the coronavirus pandemic, and the difficulty in forecasting what the future holds for banks, is making the Fed cautious. Regulators and the industry are keen to avoid the mistakes of the previous crisis, where firms made billions of dollars in payouts only to have to raise capital later. The biggest U.S. banks already said in March that they would voluntarily suspend share repurchases, which make up roughly 70% of capital payouts for the industry. What remained were the dividends, which bank analysts have mostly assumed would remain at their current levels – with the exception of Wells Fargo, which is struggling to restore profits after its fake accounts scandal. Still, options market traders have bet that banks would be forced to cut dividends, even at JPMorgan, the biggest and most profitable of the megabanks. “These companies are effectively nationalized,” David Ellison, a portfolio manager at Hennessy Funds, said in a CNBC interview. “It sounds like buybacks aren’t going to come back for a long time, and the dividends are going to be subject to what the Fed believes the economy looks like.” The banks are expected to disclose their capital plans, and whether they actually maintain their current dividend payouts, on Monday, June 29. Still, it appears that the industry dodged a bullet: Fed Governor Lael Brainard said in a separate statement that she supported a blanket suspension of all payouts for the industry. Doing so would “create a level playing field and allow all banks to preserve capital without suffering a competitive disadvantage relative to their peers,” she said. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGEiQY » Subscribe to CNBC TV: https://cnb.cx/SubscribeCNBCtelevision » Subscribe to CNBC: https://cnb.cx/SubscribeCNBC » Subscribe to CNBC Classic: https://cnb.cx/SubscribeCNBCclassic Turn to CNBC TV for the latest stock market news and analysis. From market futures to live price updates CNBC is the leader in business news worldwide. Connect with CNBC News Online Get the latest news: http://www.cnbc.com/ Follow CNBC on LinkedIn: https://cnb.cx/LinkedInCNBC Follow CNBC News on Facebook: Follow CNBC News on Twitter: https://cnb.cx/FollowCNBC Follow CNBC News on Instagram: https://cnb.cx/InstagramCNBC #CNBC #CNBC TV