America’s big banks obviously can’t be trusted not to waste valuable capital on buybacks and higher dividends in the time of the coronavirus pandemic and its impact on economic activity and especially consumers.
The US Federal Reserve on Wednesday extended its ban on buybacks and curbs on dividends from September 30 until December 31.
Over the past couple of years, the big American banks seem to be driven to boost returns to shareholders from the holdings of excess capital, but have been stymied from time to time by the Fed withholding permission for those banks that did poorly in stress tests.
Most have been allowed to pay higher dividends and/or conduct share buybacks by the coronavirus pandemic saw that put on hold in June and the halt was renewed on Wednesday.
The restrictions are similar to those from the APRA in Australia where the regulator has told banks and other major financial groups they can pay dividends, but must pay heed to the current circumstances in the economy and the health of the financial system.
Buybacks are frowned upon but not strictly banned.
In a statement on July 29 APRA indicated that for the remainder of the calendar year boards should:
– seek to retain at least half of their earnings when making decisions on capital distributions (and utilise dividend reinvestment plans and other initiatives to offset the diminution in capital from capital distributions where possible);
– conduct regular stress testing to inform decision-making and demonstrate ongoing lending capacity; and
make use of capital buffers to absorb the impacts of stress, and continue to lend to support households and businesses.
These strictures apply to the Bank of Queensland, which reports on October 14 and has already equivocated on the question of a final dividend (and says it is talking to APRA about the issue).
It also applies to the NAB< ANZ and Westpac with their final payouts – all three are expected to either omit a payment (more likely for Westpac) or reduce it.
Macquarie Group has to decide on an interim and has already warned that earnings for the six months to September will be sharply lower.
The Reserve Bank of NZ, the European Central Bank, and the Bank of England all have some form of restrictions or curbs on capital management moves by big banks and other financial groups.
The Fed’s rules app to all US banks with more than $US100 billion ($139.7 billion) in assets. They will still to be able to pay dividends, but the payouts will remain capped at their levels before the original restrictions went into place in June, the Fed said.
Stock buybacks will remain restricted until the end of the year.
The Fed introduced the original restrictions in June, as part of its annual stress tests for the nation’s 33 largest banks.
The Fed said that the risk of a double-dip recession was too great, and would put too much stress on banks’ balance sheets, causing many of them to fall below critical capital levels.
The restrictions were due to end Wednesday, with the end of the third quarter.
While the US economy is recovering from its pandemic shutdown earlier in the year, unemployment remains high and millions of Americans remain out of work. Millions of homeowners are in forbearance programs on their mortgages or have asked for relief from payments on credit cards or car loans.
The major banks have already provisioned more than $US150 billion in the March and June quarters to cover possible loan losses.
They are expected to add to those provisions in the September quarterly reports which start the week after next.
The Fed’s measures are designed to keep big bank capital levels at a high level to protect them, their customers and creditors should the coronavirus pandemic flare up yet again and require additional public health shutdowns.
Infection rates are now rising in more than half the US’s 50 states with the previously quiet New York area now seeing a surge in some areas of New York City.
