News Release: Fed Stress Tests Unleash Bank Capital Distributions at Expense of Financial Stability


July 1, 2021


Carter Dougherty
(202) 251-6700

Fed Stress Tests Unleash Bank Capital Distributions at Expense of Financial Stability

Washington, D.C. – The Federal Reserve has announced the results of its 2021 bank stress tests.  Since then, these results have led a steady parade of the largest banks in the country to announce dramatic increases in dividends.  The stress tests will also enable greater share buybacks and other capital distributions by banks. This will enrich senior executives and large shareholders, while putting financial stability at risk.

“While trillions of dollars in 2020 Federal Reserve interventions have led to boom times for the largest banks and Wall Street, much of America struggles with economic insecurity.  Big banks distributing capital back to shareholders underscores who are the real beneficiaries of the Federal Reserve’s interventions and its deregulatory initiatives.” said Erik Gerding, Senior Fellow at Americans for Financial Reform Education Fund. “Increased bank leverage when combined with deregulation, massive Fed interventions, and overheating markets should cause alarm bells to blare. Regulators should be exercising caution, and deregulation needs to stop and be turned around,” he continued.

This comes on top of previous Federal Reserve efforts to reduce the usefulness of stress tests and their role in ensuring that banks have adequate capital cushions against shocks.  Even during the economic turmoil of 2020, Vice Chair for Supervision Randall Quarles, whose term is ending in a few months, pushed to weaken all the traditional pillars of bank regulation — capital requirements, liquidity rules, and supervision.  He has also spearheaded the dilution of newer Dodd-Frank era financial stability safeguards introduced after the 2008 financial crisis, including the Volcker Rule, living wills, and inter-affiliate margin rules for derivatives.  Chair Jerome Powell has voted to support each of these deregulatory moves

“Once Chair Powell and Vice Chair Quarles lowered the bar, it isn’t surprising that banks pass their exams,” Gerding noted. Together, these deregulatory moves under the leadership of Powell and Quarles have weakened crucial and time-tested regulatory tools that give regulators visibility into emerging problems at banks and threats to financial stability.  “This is akin to turning off instruments just as a plane is flying into storm clouds,” said Gerding.

Banks withstood the economic challenges of 2020 only thanks to capital levels required by Dodd-Frank and trillions of dollars of Federal Reserve interventions to support financial institutions and markets.

According to Gerding, “when stress tests and lower capital regulations lead to capital distributions it underscores an important point: higher capital requirements do not restrict credit.  Instead, they prevent banks from distributing capital via share buybacks and dividends.”