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Fed’s Stress Test Actions Allowing Capital Payouts in the Middle of an Historic Economic Crisis Undermines Its Credibility and Makes Bank Failures and Bailouts More Likely

FOR IMMEDIATE RELEASE
Thursday, June 25, 2020
Contact: Pamela Russell at 202-618-6433 or prussell@bettermarkets.com
 
Washington, D.C.  –  Dennis M. Kelleher, President and Chief Executive Officer of Better Markets, issued the following statement in response to the Federal Reserve’s release of 2020 stress tests and aggregate pandemic-informed scenarios:
 
“While the Fed is right that ‘the banking system has been a source of strength during this crisis,’ it failed to mention that is only because they were forced by the Dodd-Frank Act and regulators to increase their capital, liquidity and resiliency. Wall Street’s biggest banks and their lobbyists opposed those reforms relentlessly even though the only thing standing between a failing bank and a taxpayer bailout is a bank’s capital cushion. That’s why regulators must insist a bank’s capital is sufficiently robust and high so it can withstand times of economic crisis, systemic stress and grave uncertainty as is now the case. 
 
“That’s also why the stress tests for Wall Street’s biggest banks released today were a credibility test for the Fed itself—would it force the banks to maintain adequate capital to ensure they are able to continue to be a ‘source of strength’ or would they bend to the unceasing Wall Street demands to eject capital regardless of the pandemic crisis? By allowing Wall Street’s most dangerous too-big-to-fail banks to reduce their capital by paying dividends at a time like this, when uncertainty about the future condition of the economy, the financial system and these banks has never been higher, the Fed failed that test. 
 
“Compounding that failure, the Fed is actually allowing these banks to lower their capital again because the banks have already cut their capital cushions this year by paying substantial dividends, often in excess of their net earnings as JP Morgan Chase and Wells Fargo did. Additionally, the Fed’s unprecedented backward-looking analysis allowing future dividend payments based on the pre-pandemic earnings of the last four quarters is inconsistent with the forward-looking structure of the stress test program. That will effectively allow the banks to pay dividends twice based on the same earnings. 
 
“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. 
 
“Moreover, withholding material information from the public, like the bank-level sensitivity analyses information here, promotes damaging speculation and guesswork that can erode public and market confidence. While the sensitivity analyses may be reasonable given the high level of uncertainty, and aggregate information being provided is helpful, today’s Fed disclosure is not sufficient to determine if the biggest, most dangerous taxpayer-backed banks are individually strong enough to survive the continuing economic downturn and to keep lending to support households and businesses. If one is not, then it could drag the whole system down, as with Lehman Brothers in 2008. This is all the more likely today given how much bigger these banks are now than they were in 2008. Only the full disclosure of concrete and specific bank-by-bank information will provide sufficient clarity and reduce damaging uncertainty.”
 
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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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