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  • The Fed has capped buybacks and dividends for many banks.
  • The move reflects concern over the effects of the COVID-19 crisis and loan losses.
  • Impacts of the crisis will likely be deeper than previously thought.

As the effects of the lingering COVID-19 crisis continue to unfold, the Federal Reserve has continued juicing the economy with stimuli. However, as in 2008, the Fed recently announced that it has put a cap on buybacks and dividends for large banks.

Banks are currently cash-heavy, as the economic stimulus packages have started to hit ledgers. The strategy is to move that cash out by repurchasing stock or paying investors dividends.

However, based on a recent stress test, the Fed determined that the COVID crisis could cause $700 billion in loan losses for top banks. The cap is designed to force banks to keep cash reserves on hand to mitigate those losses.

This policy was first implemented in the wake of the 2008 mortgage-backed securities crisis. Banks that had received bailouts began moving cash into the hands of investors but were met with secondary crises.

The current policy from the Fed reflects an awareness that the banking substructure is in substantial danger. While the stock market has increased over the past four months, the underlying fundamentals remain at great risk.

Jon Buck

With a background in science and writing, Jon's cryptophile days started in 2011 when he first heard about Bitcoin. Since then he's been learning, investing, and writing about cryptocurrencies and blockchain technology for some of the biggest publications and ICOs in the industry. After a brief stint in India, he and his family live in southern CA.

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