Question

The Federal Reserve is concerned that paying large dividends and buying back shares may be imprudent for large banks and the economy at this time. Lael Brainard, a Federal Reserve official, and others felt the Federal Reserve should have imposed stricter limits than it did on the banks. What policy did Brainard want to see adopted? Explain what Brainard is worried about and why – that is how would the economy be affected if Brainard’s fears come true? (10 points. 6-7 sentences)

Answer 1

Lael Brainard is the governor of federal Reserve system. She stated that all the banks need to preserve capital in order to deal with the financial crises under the adverse situation of covid -19..

The policies that Brainard want to see adopted are :

1. All the banks should resubmit their capital plans in order to ensure there is no distribution of capital until the board notices.

2. Stress testing can ensure that the large bank can have enormous capital to withstand against the recesion prevailing.

3. Vital credit shoulde be continuing yo households and businesses.

3. Implementing the idea of authorizing third quarter divident over the four quarter divident.

Lael Brainard is worried that in the upcoming year, many large banks are going to suffer huge loss under the adverse effect of covid-19. The banks could face loss in rates and capital ratio with great amount of uncertainty. This will increase unemployment and lower gross domestic product giving big shock to the economic growth.So all the bank will need larger capital to absorb such losses.