By Andrew Ackerman and Nick Timiraos 

This article is being republished as part of our daily reproduction of articles that also appeared in the U.S. print edition of The Wall Street Journal (April 4, 2020).

U.S. banks will likely be allowed to keep paying dividends to shareholders, according to people familiar with the matter, even as the coronavirus pandemic threatens to create a mountain of bad loans that could eventually weaken the lenders.

Some former U.S. regulators have said the Federal Reserve should order the largest banks to suspend payouts to preserve capital at a time of soaring unemployment and business disruption that may eclipse the 2008 financial crisis.

"If things work out well, banks can distribute income later on," said Janet Yellen, a former Fed chairwoman. "If not, they'll have a buffer that will be needed to support the credit needs of the economy."

The European Central Bank and the Bank of England have pressured banks to stop using their capital to make dividend payments to shareholders, raising questions about whether the Fed would follow suit in the U.S. But Fed officials are unlikely to do so, at least in the short term. They see key differences in how lenders distribute capital on the two continents, and they plan to conduct a more deliberate analysis of the U.S. banking system's health,the people said.

Cleveland Fed President Loretta Mester said she prefers to await the results of the next set of the banks' "stress tests" in June before deciding whether to limit dividend payments. The tests are used to assess banks' ability to continue lending in a crisis. Banks are required to submit plans showing how they would weather a deep recession and maintain sufficient capital by Monday. The central bank will announce the results of the tests by the end of June.

"Our stress test can give us insight into where capital should be needed, " said Ms. Mester in an interview Thursday. "My preference would be to wait for the stress tests, but different people can have different opinions about that."Any decision to halt dividends lies with the five members of the Federal Reserve Board of Governors; Fed bank presidents don't have a vote.

U.S. central bankers may fear that halting dividends now would send a signal that they are worried about the solvency of the banking system. And because dividends are paid quarterly in the U.S. instead of annually as in Europe, the Fed has the ability to reassess the situation in the coming weeks and months.

Ordering banks to suspend dividend payments would be tantamount to "kicking them in the shins" at a time when the government is relying on them to continue lending through the downturn, said Christopher Marinac, director of research for Janney Montgomery Scott LLC. "It's telling the banks they did something wrong when in fact they did a lot right by building capital and strong earnings," Mr. Marinac said. "If we learn later that bank earnings and bank capital is not as strong as we thought, that's a different matter."

Mr. Marinac estimates that large- and medium-size banks will distribute about $54 billion in dividends for all of 2020, or roughly $13.5 billion per quarter.

The biggest U.S. banks, including Bank of America Corp. and JPMorgan Chase & Co., already have halted share buybacks, which make up the bulk of their capital distributions -- a move the Fed may see as going a long way toward preventing the economic downturn from morphing into a financial crisis. And, dividends comprise a much smaller slice of the capital distributions made by U.S. banks -- roughly 25% -- compared with 75% in Europe.

The Financial Services Forum, which represents the big banks, said its members' decision to suspend buybacks would free up capital for loans to consumers and businesses struggling with the rapid economic slowdown.

Meanwhile, banks have signaled they have no intention of cutting dividends. "From our perspective, our dividend is sound, and we plan on continuing to pay it," Citigroup Inc. CEO Michael Corbat said Wednesday in an interview on CNBC.

But some economists have said prudent planning would call for banks to now conserve capital -- as a form of insurance in case the virus pandemic turns more severe. They cite an unemployment rate that is likely to rise above 10% as soon as April, higher than the most adverse scenarios contemplated by the Fed's most recent stress test.

Jeremy Stein, a former Fed governor who teaches economics at Harvard University, lauded the central bank for moving quickly to support market functioning by lending aggressively and purchasing massive amounts of securities.

But he faulted regulators for not doing more to bulk up banks' ability to weather a deeper downturn.

"The Fed has done really, really well on almost every other dimension so far, but this is a glaring exception" Mr. Stein said. "I just think it's a mistake. It is a no brainer."

While banks are in a better position than they were in 2008, when the crisis emerged from within the financial sector, former regulators said the experiences from that episode still offered important lessons -- namely, that it would have been easier for banks to raise capital when troubles in bond markets first deepened in mid-2007. The financial panic didn't accelerate until September 2008 with the failure of Lehman Brothers.

"Allowing some banks to continue dividends in 2008 further eroded their capital just when it was needed most," said former Fed governor Daniel Tarullo, who oversaw bank regulation from 2009 until 2017.

For her part, Ms. Yellen played down the risk that ordering a suspension of dividends would signal that the Fed is worried about banks' health.

If all big banks are told to stop paying dividends, then investors wouldn't conclude that any single bank is in trouble, she said.

"I frankly don't think there is a significant trade-off because with all banks being told to do this, the usual argument against forgoing dividends -- that if a bank does this it will signal it is in trouble -- doesn't apply," she said.

Write to Andrew Ackerman at and Nick Timiraos at


(END) Dow Jones Newswires

April 04, 2020 02:47 ET (06:47 GMT)

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