An annual stress test of banks introduced by U.S. regulators after the 2007-09 f...
NEW YORK/WASHINGTON - An annual stress test of banks introduced by U.S. regulators after the 2007-09 financial crisis to prevent taxpayer bailouts has become a fight over how quickly lenders can return capital to shareholders.
The Federal Reserve on Thursday approved the capital plans of 18 banks in this year’s test, although it placed conditions on the U.S. operations of Credit Suisse Group AG after identifying weaknesses in its capital planning. The Fed began publishing the results of the capital planning check in 2012. It is the second part of the Fed’s annual test of banks, assessing what level of cash banks can return to shareholders through dividends and share buybacks.
As they push to maximize shareholder payouts, banks run a greater risk of seeing their capital levels dip below regulatory minimums when run through a hypothetical economic downturn. That’s what happened to JPMorgan this time. After the bank resubmitted its plan with a lower payout rate, it was approved.
There is little doubt that banks are becoming more headstrong. Fitch analyst Bain Rumohr said that, for this year, U.S. banks’ payout ratios - the percentage of earnings they payout as dividends and share buy backs - have risen to over 100% of earnings, compared with 80% to 90% last year. Goldman Sachs Group Inc and Morgan Stanley received conditional passes in the test last year, meaning they could not increase their capital distributions to shareholders.
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