Federal Reserve repares second stress test for large US banks

The Federal Reserve is reported to announce by the end of September whether it will continue prohibiting bank stock buybacks and limiting dividends into the fourth quarter.

This follows June's instruction from the Federal Reserve when it told the biggest US. banks that they could not increase dividends or resume buybacks through at least the third quarter as uncertainty over the course of a global pandemic weigh on lenders.

This followed the Fed's review of the effects of the coronavirus on the economy and financial system that uncovered potential risks and had put the fate of their dividends in question.

The Fed “is taking action to assess banks’ conditions more intensively and to require the largest banks to adopt prudent measures to preserve capital in the coming months,” Fed Vice Chairman for Supervision Randal Quarles said in the June statement. “The banking system remains well-capitalized under even the harshest of these downside scenarios.”

Market implications

The banking sector has been under pressure since August as the KRE index which remains in the bearish territory on the daily chart. 

However, the earnings results were solid in the last quarter and risk appetite remains elevated into the fourth.