We may or may not like various parts of Dodd Frank but this all seems entirely reasonable–the major US banks have all passed the relevant stress tests and thus are allowed to return capital to shareholders through dividends and stock buybacks. This is how the system was meant to work after all, there’s no requirement that they then hold more capital than the regulations say they must. And without being too sarcastic about it, there’s probably good reason they shouldn’t hold more capital than they are required to–these regulations, formed by the finest Solons on he planet, will have defined the correct amount, won’t they? To think otherwise is to worry that perhaps detailed regulation isn’t the way to solve all problems.
The news today is that most of the large banks have announced large capital disbursements:
Shares of large U.S. banks jumped higher in the premarket Thursday after the Federal Reserve cleared their capital return plans.
Morgan Stanley, JPMorgan Chase, Wells Fargo, Citigroup and Bank of America all traded at least 1 percent higher before the bell.
The U.S. central bank did not object to any of the buybacks or dividend hikes from the 34 banks it reviewed during the second phase of its annual stress test.
The results seem to be rather higher than that actually:
Morgan Stanley was up 2.7 percent, Citigroup Inc 2.6 percent, Bank of America Corp 2.4 percent, JPMorgan Chase & Co 2 percent, Wells Fargo & Co 1.7 percent and Goldman Sachs Group Inc 1.3 percent.
And here’s what the real point to all of this is:
The Federal Reserve told big banks they have more than enough capital, and they promptly announced a windfall for their shareholders.
Think back to what the Crash actually was. In its action it was a wholesale run on the large banks. People who didn’t have FDIC insurance (ie, pretty much everyone with more than $250 k I think) wanted to get their money out. Out of the banking system entirely by choice but if not then into a banking institution they knew was safe. The problem is no one really knew who was safe. For the banks had all been operating with thin capital cushions. As the losses on those CDOs and all that started to come through those cushions were being eaten away at–that of Lehman vanished for example. No one really knew who was safe any more and that’s really what the problem was.
OK, so our problem is in two parts then, one is the run, one is the lack of capital causing the uncertainty–who had enough capital to absorb their losses and who didn’t? This part of Dodd Frank, these stress tests, cannot tell us who would survive a run. For capital doesn’t aid you in surviving one, that’s what the Federal Reserve and their emergency lending powers are for. But obviously, a decent amount of capital can stop people from worrying about whether you’re going to go bust by convincing them that you’ve enough capital to survive some losses.
I’m deeply unsure about the details of these tests–unsure in the sense that I doubt they’re quite right….