US Fed official urges large banks to raise capital

U.S. Federal Reserve building in Washington D.C.

Washington, (Asian independent) A senior US Federal Reserve official has urged large banks to raise capital to help economy weather the COVID-19 pandemic.

“Large banks are eager to be part of the solution to the coronavirus crisis. The most patriotic thing they could do today would be to stop paying dividends and raise equity capital, to ensure that they can endure a deep economic downturn,” Xinhua news agency quoted Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, as saying in the Financial Times on Thursday.

While US banks have more equity today than they had going into the 2008 global financial crisis, a prolonged COVID-19 pandemic could put banks at risk again, Kashkari noted.

“An extended economic downturn could easily sap banks’ current equity capital. Stress test modelling by the Minneapolis Fed indicates that under severe COVID-19 scenarios, large banks … could together lose hundreds of billions of dollars of equity capital,” he said.

Noting that US taxpayers injected about $200 billion of capital to strengthen banks in 2008, Kashkari said raising that amount from private investors today would ensure that large banks can support the economy over a broad range of virus scenarios.

“If the crisis turns out less serious than we fear, banks can return the capital through buybacks and dividends once the crisis passes,” he said.

Kashkari’s comments came after the Fed said on Wednesday that economic activity “contracted sharply and abruptly” across all regions in the US as a result of the COVID-19 pandemic.

“The hardest-hit industries – because of social distancing measures and mandated closures – were leisure and hospitality, and retail aside from essential goods,” the Fed said in its latest survey on economic conditions, known as the Beige Book.