Pandemic May Hinder Bank Lending, Report Warns

Adult bank officer shows concern.

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U.S. banks have so far proven resilient to the economic turmoil of the COVID-19 crisis, but depending on their losses, they may be less able to lend to consumers and businesses down the road, according to a new analysis by economists at the Federal Reserve Bank of New York. 

That day may come sooner if banks continue shareholder payouts at their current pace, the economists wrote in a report Monday. Regulators require banks to maintain a minimum amount of capital and a series of “buffers” on top of this minimum to ensure resilience.

The report, which modeled what would happen in different types of economic recovery, warns that in the pessimistic event of a lackluster “L-shaped” recovery from the pandemic, 52 of the 200 largest banks would have to dip into their buffers if they continue paying dividends. Only 36 would be in that position if they don’t keep paying dividends.

“The ability of banks to support lending to consumers and businesses will be affected by the extent of losses they face and the amount of capital they have after absorbing those losses,” the economists wrote. The losses “could limit banks’ ability to expand lending, even if they were willing to dip into their buffers.”

The report comes five days after the Federal Reserve Board extended restrictions on shareholder payouts for another three months. The measures, which were first imposed in June to ensure the banks continue to have enough capital on hand to weather the crisis, include a cap on dividends and a ban on share repurchases for the largest banks. 

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