The constraints imposed by the Federal Government to big banks are starting to produce dramatic effects in terms of dividend distribution. According Reality Share, an investment firm cited by the Wall Street Journal, the 23 banks in the S&P 500 had distributed in 2007 over $45 billion to shareholders. The figure fell to $26.4 billion this year.
Of the 31 banking institutions located in the United States, some are showing some reserved disappointments. There was a federal evaluation, or stress test, imposed by the Federal Government looking at what potential strengths could be tapped into in the case of a serious financial crisis. A large number of them had been called to review their evaluations of the stress tests imposed by the Federal Government.
The purpose of these tests is to ensure that the big banks are in a position to “continue to lend to businesses and households, even during a period of significant financial stress,” recalled Daniel Tarullo, Governor of the Fed, responsible for regulatory matters.
Imagine the scenarios of business failures in series, a sharp drop in the stock market, an increase in market volatility. In short, a whole series of phenomena that could potentially cause heavy losses for banks.
The question is whether or not the institutions have sufficient capital relative to their commitments and do not distribute too large a share of their profits to their shareholders.
While these tests are mandatory for in-country banks, foreign banks aren’t denied the opportunity. Though it doesn’t look up as two banks in particular, Deutsche Bank and Santander thus far been denied dividend plans. For the Spanish bank is the second consecutive year it has failed to successfully pass the stress test.
The Fed said that its capital distribution plan presented reviews and generalizes weaknesses. The record is even more sensitive since Santander is a large lender to the United States. For Deutsche Bank, the regulator says there are numerous and significant deficiencies considered in terms of identifying risks both in its ability to anticipate losses in its approach to internal controls.
The public debt repurchase program by the ECB was analyzed by Andreas Höfert, Europe UBS chief economist. The German bank has defended itself, in a statement, noting that it had recruited a total of 1,800 employees in the United States responsible for strengthening the controls. In addition, Bank of America, the second largest US bank by assets, has received conditional approval. They were charged to bring a number of elements by September to get the Fed’s approval to distribute a dividend and to buy back shares as it intends to do.
Bank of America plans to launch a share repurchase program of $4 billion. But again, the regulator believes that internal controls are not up to expectations, which casts doubt on its ability to redistribute that much money to the shareholders.
“We believe this share repurchase program is the best way to continue to create value for our shareholders,” however maintained Brian Moynihan, head of the group in a statement, while committing to time wanted the framework set by the Fed.
Finally, the regulator also asked Goldman Sachs, JPMorgan Chase and Morgan Stanley to reduce the distribution of their profits to their shareholders. Goldman Sachs was then called to order for the second consecutive year.
Morgan Stanley, for its part, had to scale back the $5 billion that the bank had redistributed in part to its shareholders in the form of share repurchases and partly in the as a 50% increase of the dividend.
James Gorman, CEO of the bank has justified these amounts in order to reward the efforts made in recent years by the group, however, Citigroup, which failed these tests twice in the last three years, finally successfully overcome the obstacle. Michael Corbat, the group’s boss had also expressed his intention to resign if Citigroup failed adventure this year.