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The Federal Reserve recently banned 34 largest banks from share buybacks in the third quarter (Q3). The Fed additionally, capped dividend payment to the second quarter (Q2) levels for these banks.

In addition to releasing the results of the 2020 bank stress test, the US central bank also released sensitivity analyses, due to the coronavirus (COVID-19) economic impact, on Thursday.

While providing a broad update of the stress test, Fed Vice Chair Randal K. Quarles said that the banking system has been a source of strength during this crisis and the results of our sensitivity analyses show that our banks can remain strong in the face of even the harshest shocks.

Key quotes

The Board took several actions following its stress tests to ensure large banks remain resilient despite the economic uncertainty from the coronavirus event.

For the third quarter of this year, the Board is requiring large banks to preserve capital by suspending share repurchases, capping dividend payments, and allowing dividends according to a formula based on recent income. The Board is also requiring banks to re-evaluate their longer-term capital plans.

All large banks will be required to resubmit and update their capital plans later this year to reflect current stresses, which will help firms re-assess their capital needs and maintain strong capital planning practices during this period of uncertainty. The Board will conduct additional analysis each quarter to determine if adjustments to this response are appropriate.

FX implications

Although the announcement came after Wall Street’s close, the news might help equities to extend the recent consolidation and favor a bit to the risks. However, fears of the coronavirus (COVID-19) as harsh enough to restrict any major optimism.