A long-running clash over the ability of Wall Street banks to weather hard times and still pay shareholder dividends is gaining urgency as the number of Covid-19 cases ticks up and economic data remain gloomy.

Critics, including a number of government and Federal Reserve veterans of the 2008 financial crisis, say they’d rather see the banks marshal resources for a rocky road ahead than continue paying shareholders.

On Thursday, the central bank will announce results of its annual stress tests, which for the first time will include a “sensitivity analysis” to gauge how well banks can navigate an economy shattered by a global pandemic. While the Fed will release evaluations for individual institutions, the outcome of the sensitivity exam will have a single score for all the banks in the test.

The findings could feed a growing clamor for the biggest banks to suspend or cut dividend payments after they temporarily quit share buybacks for this quarter. Sheila Bair, who led the Federal Deposit Insurance Corp. during the last crisis, said the Fed shouldn’t need stress tests to put a stop to dividends.

“It troubles me that the Fed seems to be struggling to make a judgment independent from what the big banks want,” Bair said in an interview. “We don’t know how bad it will get. It’s common sense and prudence to ask banks to retain capital.”

Net Incomes
During the months-long coronavirus lockdown, the biggest U.S. banks stuck to their intention to continue dividends. For the first three months of 2020, the four biggest U.S. commercial banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- all paid them, with JPMorgan and Wells Fargo paying out more than their net incomes.

From the start of 2017 through March, the four banks cumulatively returned about $1.26 to shareholders for every $1 they reported in net income, according to data compiled by Bloomberg. Citigroup returned almost twice as much money to its stockholders as it earned, according to the data, which includes dividends on preferred shares. The banks declined to comment.

Fed watchers, including Bloomberg Intelligence analyst Ben Elliott, say it’s unlikely the central bank will mandate a broad-based cut or suspension of dividend payments this week. The Fed declined to comment.

“The Fed has been great in all other respects,” Jeremy Stein, chairman of the Harvard University economics department and a Fed governor from 2012 to 2014, said in an interview, referring to the central bank’s bailout programs. “But here, on bank regulation, they’re behind.” Stopping dividends is “a no-brainer.”

Federal Reserve Bank of Minneapolis President Neel Kashkari, who as a Treasury Department official in 2008 helped design the Troubled Asset Relief Program, called on the banks to raise capital rather than spend it on payments to shareholders. In a Financial Times op-ed in April, Kashkari said that would be “the most patriotic thing.” And in an interview, Donald Kohn, who was the Fed’s vice chair under Ben Bernanke during the financial crisis, said it’s important to “make sure the banks have enough capital to survive a prolonged downturn in the economy.”

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