Major Banks Suspend Stock Buybacks as Interest Rates Fall to Zero

According to reports, a group of major US banks including JPMorgan Chase, Bank of America, Citigroup, Morgan Stanley, Wells Fargo, Goldman Sachs and two others have suspended stock buybacks through the second quarter. [CNBC] The Financial Services Forum said that the coronavirus (Covid-19) pandemic was an “unprecedented challenge.”

No More Buybacks

Stock buybacks, or share repurchases, are the re-acquisition by a company of its own stock, providing a more flexible way of returning money to shareholders. The effect of a buyback is to reduce the number of outstanding shares on the market, which increases the ownership stake of the shareholders. The report added that JPMorgan alone did more than $6 billion in net repurchases, which accounts for extra shares issued to employees, in the fourth quarter of 2019. Bank stocks have been battered this year, with shares of JPMorgan and Morgan Stanley both down more than 25% year-to-date, while Citi’s stock has fallen more than 36%. The Forum added that its decision on buybacks,

“…is consistent with our collective objective to use our significant capital and liquidity to provide maximum support to individuals, small businesses, and the broader economy through lending and other important services.”

Most industries have been severely impacted by the outbreak this year, with travel, financial services and crypto being hit particularly hard.

Interest Rate Falls to Zero

The move comes as the US Federal Reserve cut its interest rate target by 1% and launched a program of at least $700 billion in asset purchases. According to reports, the central bank pumped more cash into the financial system to boost liquidity while dropping interest rates to zero. [USA Today] The cut has returned rates to the levels they lulled at for years after the 2008 financial crisis as the country faces its first bear market in over a decade. The Fed added,

“The effects of the coronavirus will weigh on economic activity in the near-term and pose risks to the economic outlook.”

President Trump, who still supports negative interest rates, congratulated the move. However, it is still unlikely to be enough to prevent a full blown recession in the US. Crypto markets have suffered particularly badly, with total market capitalization for all digital assets dumping more than 38% this month to an 11-month low. Financial stimulus is effectively just a band aid solution, and the real cure will only come when a vaccine becomes available to the public.