Large US banks are poised to hand over more capital to investors than they are generating from their businesses for the first time since the 2008 crisis, lowering their defenses against another catastrophic shock to the financial system.
Shareholders in 22 of the country’s biggest listed banks are in line for a record haul of almost $170bn in dividends and stock buybacks over the coming year, according to Barclays research, about a quarter more than in 2017.
Federal Reserve regulators are preparing to release first round results this week from their annual stress tests, which govern banking dividends and stock buybacks.
The expected rise in payouts shows how the industry is bouncing back from years of depressed returns. Not only are banks generating billions of dollars in additional profits from lower taxes and higher interest rates, but the Fed is allowing them to return more of their earnings to shareholders.
Analysts at Goldman Sachs, Credit Suisse and Keefe, Bruyette & Woods predict the average bank will get the go-ahead to hand over more capital than profits produced over the next four quarters.
While some individual banks have been able to do so in prior years, the industry overall has not paid out more than its earnings since 2007, according to Barclays.
The distribution plans give ammunition to critics who argue that banks should instead be required to strengthen capital buffers to prevent future taxpayer bailouts.
The payouts were “outrageous”, said Anat Admati, finance professor at Stanford University. She argued that too-big-to-fail banks should not be allowed to make them “until we are sure they do not pose a danger to society any more”.
Regulators say that after years of building loss-absorbing cushions, banks have become better able to withstand a meltdown of the kind that rocked global financial markets in 2008.
Officials are expected to allow higher payouts this year because they have become more comfortable with banks’ improved capital positions — not because they have relaxed the stress tests.
Indeed the Fed has made the regime tougher this year, a reminder that in spite of the Trump administration’s deregulatory agenda, broad post-crisis restrictions remain in place for the biggest banks.
Officials are forcing banks to incorporate a more severe unemployment and property market shock into their capital return plans, for instance, prompting analysts to rein in capital return forecasts.
Goldman Sachs (GS) and Morgan Stanley (MS), whose balance sheets fared worse than several other banks on some metrics in last year’s tests, are expected to get permission to pay out smaller proportions of profits than rivals including Citigroup (C) and JPMorgan Chase (JPM).
Analysts caution that banks could yet be tripped up by the tests, which assess “qualitative” factors such as risk management as well as balance sheet strength.
The Fed is scheduled to publish the results of the first round of its stress tests on Thursday, a prelude to the more consequential second round next week, when investors will learn how much capital banks can return.
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