Mega-Banks Blow 100% of Earnings on Share-Buybacks & Dividends, Crimp Lending, Constrain Economy
by Wolf Richter
WolfStreet.com
Aug 2, 2017
“The real economy has little to gain, and much to lose.”
When tighter regulations were imposed on the banks after the Financial Crisis, the largest among them, the very ones that threatened to bring down the financial system, began squealing. Those voices are now being heard by Congress, which is considering deregulating the banks again. In particular, they claim that current capital requirements force banks to curtail their lending to businesses and consumers, and thus hurt the economy.
Nonsense! That’s in essence what FDIC Vice Chairman Thomas Hoenig told Senate Banking Committee Chairman Mike Crapo and the committee’s senior Democrat, Sherrod Brown, in a letter dated Tuesday, according to Reuters. The senators are trying to find a compromise on bank deregulation.
If banks wanted to increase lending, they could easily do so without lower capital requirements, Hoenig pointed out.
Rather than blowing their income on share-buybacks or paying it out in form of dividends, banks could retain more of their income, thus adding it to regulatory capital. Capital absorbs the losses from bad loans. Higher capital levels make a bank more resilient during the next crisis. If there isn’t enough capital, the bank collapses and gets bailed out. But banks that increase their capital levels through retained earnings are stronger and can lend more.
Alas, in the first quarter, the 10 largest bank holding companies in the US plowed over 100% of their earnings into share buybacks and dividends, he wrote. If they had retained more of their income, they could have boosted lending by $1 trillion.
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