Statement of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, on the FDIC's Policy Regarding Bank Capital Distributions During Unusual and Exigent Circumstances

For today's meeting of the FDIC Board of Directors, I have circulated a discussion draft for a policy that would limit bank boards from depleting funds through share buybacks and dividends during times of stress in the financial system, such as when the Federal Reserve Board of Governors and the Treasury Secretary activate emergency authorities to support the financial system.¹Once an economic shock hits, limiting banks from buying back shares and paying dividends can be critical. These actions deplete capital, giving money to shareholders that is then no longer available to absorb losses or lend to customers. Without a broad prohibition, the FDIC is put in the position of imposing limitations on a case-by-case basis. While this may seem attractive, doing so would raise questions in the capital markets about that individual institution's viability.

To protect the Deposit Insurance Fund, we should consider whether emergency actions should automatically lead to restrictions on distributions of capital, since it may actually reduce depositor runs in the aggregate. During the last three periods of stress, regulators did not impose these restrictions. This inaction allowed banks to reward executives and shareholders while the public was either directly or indirectly bailing out those same firms.

Past Experiences with Stress in the Financial System

I want to briefly highlight a few examples before turning to the discussion draft of a new FDIC enforcement policy.

Stress began to spread in the financial system in the summer of 2007, but the failure of investment banking giant Bear Stearns in March 2008 made it clear a crisis had begun. The Federal Reserve established the first of its many emergency lending facilities that month, declaring that there were "unusual and exigent circumstances" that necessitated extraordinary government support.

Many of these emergency lending facilities provide benefits to financial firms, even ones that aren't immediately in trouble. But despite declarations of an emergency, we saw banks paid out roughly $12 billion in dividends in the second quarter of 2008. They paid out $11 billion in the third quarter. They paid out $8 billion in the fourth quarter. During this time, the U.S. government was providing enormous support and bailing out the system through multiple mechanisms.²

In fact, during the full financial crisis period, banks which had received bailout funds paid almost 34% of the amount they received as dividends.³ Put differently, banks took a large chunk of bailout money and handed it to shareholders and executives.

In 2020, the COVID-19 pandemic shut down the entire economy. The Fed established an even greater number of emergency lending facilities than in the 2008 financial crisis. While share buybacks were limited, the banking industry still paid out almost $50 billion in 2020 dividends.⁴

In March 2023, after the failure of Silicon Valley Bank and Signature Bank, and right before the failure of First Republic Bank, the Federal Reserve established the Bank Term Funding Program emergency lending facility. Banks were allowed to borrow against the face value of certain securities that had lost significant market value.

After three of the largest bank failures in U.S. history, while benefitting from an unprecedented emergency loan facility, banks paid out $54 billion in dividends and significantly more than that in share buybacks in 2023.⁵

Based on the last three periods of financial system stress, I think it's clear we need a playbook in advance that defers these payouts until after financial system stress subsides.

Preparing for a Crisis

Let me turn to the discussion draft. It clarifies that the FDIC views dividends and buybacks during a period of stress, as marked by the existence of a Federal Reserve emergency lending facility, as an unsafe and unsound practice. Under this approach, the FDIC would use its cease-and-desist enforcement authority to prevent banks from engaging in buybacks or dividends. In instances in which bank subsidiaries wish to send dividends to the holding company to pay creditors or other expenses, that would generally be permitted.

There are currently some automatic restrictions embedded in our rules on a bank-by-bank basis based on regulatory capital levels. Those can be helpful for individual stress or localized stress, even though regulatory capital is a delayed measure. We continue to find that panic can quickly spread unless we act decisively. Broader economic distress requires a system-wide approach.

If banks make it through the crisis unscathed, they can make up for lost time by hiking buybacks and dividends once we get through the storm. This policy is all about ensuring banks are maintaining resources to absorb losses and lend to real people when they need it the most.

Over the long term, I think a rulemaking by all agencies would be best. But we never know when the next crisis will hit, so getting a clear policy in place immediately is appropriate.

I appreciate all of the discussion that this draft has already sparked, as we evaluate our readiness to stabilize the system if there is a shock. It is far better to deliberate and refine our playbook now, rather than waiting until it is too late.