As Fed Allows Banks to Pay Out Billions in Dividends, Senator Warren Asks the Largest Financial Institutions How They Are Assessing and Mitigating Risks Resulting from the COVID-19 Induced Recession
Senator Warren calls for greater attention to the health of large banks as the Fed allows banks to continue paying dividends, depleting capital base used to support lending to families and businesses. "The safety and soundness of the banking sector cannot be taken for granted, and the American people deserve full transparency regarding the health of the financial system."
Washington, DC - United States Senator Elizabeth Warren (D-Mass.), Ranking Member of the Senate Committee on Banking, Housing, and Urban Affairs' Subcommittee on Consumer Protection and Financial Institutions sent letters to the largest banks -- those with over $250 billion in total consolidated assets -- requesting information on how these institutions are assessing and mitigating risks resulting from the COVID-19 pandemic. Senator Warren raised concerns about the Federal Reserve Board of Governors’ lack of transparency about methods and findings of its recent stress tests and noted that banks may not be prepared for the economic fallout in the coming months, especially if households and businesses don’t receive needed relief from Congress.
"I write to inquire how you are assessing and mitigating the risks to your institution and to the financial system resulting from the ongoing recession-induced by the coronavirus disease (COVID-19) pandemic. Specifically, because the Federal Reserve Board of Governors (Fed) has failed to protect banks’ balance sheets and ensure the resiliency of our financial system, and has provided only limited transparency about the methods and findings of its first round of annual bank stress tests, I am writing to request that you provide additional information about your institution's preparedness for the continued economic fallout from COVID-19," wrote the Senator.
The 2008 financial crisis revealed that many financial institutions were not sufficiently prepared to handle large economic shocks. As a result, ten years ago, the Dodd-Frank Act was signed into law, requiring the Fed to conduct supervisory stress tests to ensure "large, complex financial institutions have sufficient capital to allow them to remain viable intermediaries even under highly stressful conditions."
However, this year's stress tests were initially undermined by the Fed's failure to use them to assess risks from the COVID-19 pandemic. Instead, the Fed included incomplete and inadequate "sensitivity analyses,” to account for COVID-19, but refused to provide the results to show how individual banks fared under the scenarios. Despite this lack of transparency, the Fed did raise concerns about the preparedness of individual banks to weather shocks, noting the Fed remains “focused on certain firms that are particularly sensitive to the current economic outlook, whose outlooks are more optimistic than appropriate given current conditions, whose credit cost forecasts have not considered a range of possible outcomes, or whose planning has not been thoughtful."
“This is an alarming statement on its own, but the context in which it was made—in the middle of an unprecedented global pandemic and recession with an uncertain economic trajectory—makes it an indictment of the preparedness and seriousness with which certain banks are meeting this moment,” the Senator wrote.
Senator Warren’s questions come after the Fed announced last week that it would allow banks to continue paying dividends to enrich their shareholders rather than preserve capital to support lending to households and small businesses. Additionally, President Trump’s refusal to negotiate on a relief package is particularly alarming given the Fed’s acknowledgment that many banks “capital forecasts tend to be strongly dependent on the assumption of whether there will be additional rounds of economic stimulus.” While the Fed recently indicated that it would be conducting additional analyses with scenarios that more closely resemble the downside economic scenarios our country could face in the coming months, these results will not be released until the end of the year, and these recent developments call for immediate transparency into the health of the banking sector.
Since the beginning of the coronavirus outbreak, Senator Warren has worked to ensure that the Trump Administration is effectively responding to the COVID-19 outbreak and that the U.S. has the resources needed to address this threat. Her ongoing efforts include the following:
- In July, Senator Warren and Senator Schatz sent a letter to Federal Reserve Chair Powell and Vice Chair for Supervision Quarles raising concerns about the Fed's lack of transparency and inaction to improve stability in the banking system following the release of the results from Fed analyses that showed banks may be vulnerable to losses during the COVID-19-driven recession.
- Senators Warren and Brown (D-Ohio) sent letters in June to the Federal Reserve Board of Governors (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) regarding recent changes that weaken the Supplementary Leverage Ratio (SLR), a key component of the regulatory framework that was developed following the 2007-2008 financial crisis to protect the safety and soundness of the financial system.
- In February, Senator Warren sent letters to the CEOs of Citigroup, JPMorgan Chase, Goldman Sachs, Bank of America and Morgan Stanley -- the U.S.-based “Too Big to Fail” banks with the largest foreign exposures -- asking about how they are monitoring and preparing to mitigate the economic risks of the outbreak of the coronavirus.
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