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Cushioning the Blow
How much capital can banks afford to run off?
Last week, the Federal Reserve indicated that all 33 of the nation’s biggest banks passed their annual stress test. These institutions hypothetically have a big enough cushion to absorb the more than $600 billion in forecasted losses that would be incurred during a severely adverse economic scenario.
But in those results were some small wrinkles: The Fed increased the stress-capital buffers for Bank of America Corp., Citigroup and JPMorgan Chase & Co. Bank of America announced a 1 cent dividend increase, while Citigroup and JPMorgan kept their dividends unchanged.
Other banks increased their quarterly dividend: PNC Financial Services Group announced a 20% raise, and Truist Financial Corp. increased its quarterly dividend by 8%.
The pairing of the stress test results and related capital actions always raises questions for me: How much capital can banks afford to return to shareholders, and how much should they keep for potential tough times? When is the right time to return it, and when should they hold it?
These aren’t hypothetical questions. In March 2007, the board of directors at Cleveland-based National City Corp. repurchased $1.6 billion of stock. Before the third quarter of that year, they increased the dividend to 41 cents, from 39 cents. But the nation’s eighth-largest bank at the time would close 2007 with a $333 million loss in the fourth quarter. Losses continued to mount, totaling $4 billion for the nine months preceding its acquisition at $2.23 a share by PNC in October 2008.
It's undeniable that banks have more capital these days, along with better data and models. But it’s also undeniable that risk and uncertainty are once again on the rise. Moderate credit risk could change given persistent inflation. A recession could be on the horizon. I’ve seen the word “stagflation” more times in the last 10 days than in the last 10 years.
“The current economic cycle has several complicating factors that differentiates it from past high inflationary environments,” wrote analysts at Fitch Ratings recently. “As such, there is no directly comparable historical period to draw clear inferences, which results in a broad range of potential outcomes for the economy and the banking industry.”
No one can predict what’s ahead. In an economy that seems increasingly complicated, I’m reminded that one of the things that banks can control is how much capital they hold — and how much they release.
• Kiah Lau Haslett, managing editor of Bank Director
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