Opinion
Op-ed: Strength of Large U.S. Banks Means It’s Time to Rely on Rigorous Capital Distribution Process
06.23.21 | Capital and Financial Stability

This op-ed was featured in Morning Consult.

 

By Kevin Fromer

Later this week, the Federal Reserve will issue results of its latest round of stress tests, offering an update on the health and safety of the largest banks in the country. This assessment marks the third round of stress tests the government has conducted in a year to measure the capital adequacy of large U.S. banks.

These results will herald the full return to the government’s normal capital distribution oversight process, which was halted in 2020 due to the uncertain economic effects of the pandemic. Given the strength of the nation’s largest banks and the rapid improvement in the economy, it is clearly time to rely on the established and rigorous regulatory process, which allows banks to return excess capital to investors across the country. This return to regular order will support the economy as we build a strong, inclusive recovery.

Capital distributions are expected by investors in any large corporation. Companies in a variety of industries routinely distribute portions of their earnings to investors — it is how American companies attract investment so that they can grow, create jobs, expand services and better support the economy.

Despite what critics would have you believe, the capital distribution process is not a zero-sum game. Share distributions complement — not replace — the investments that banks make in their communities, workers, operations and businesses. Only safe and highly capitalized banking institutions can even consider buybacks or dividends.

What’s more, unlike every other industry, large financial institutions face higher regulatory scrutiny and approval to buy back shares or to issue dividends.

This year, large banks must pass a strenuous stress test to demonstrate they maintain a strong capital position and can support the economy, even during a significant downturn. They must further satisfy several different regulatory capital requirements each quarter to continue making planned buybacks and dividends. Then, and only then, are banks able to distribute capital.

In the most recent test, which the Federal Reserve completed in December, the average post-stress capital ratio for the U.S. Global Systemically Important Banks was 9.7 percent, significantly larger than that of other U.S. banks subject to the stress tests and more than twice the minimum requirement of 4.5 percent.

The largest U.S. banks entered the global pandemic in a strong position and they acted quickly to support customers, small businesses, employees and the communities in which they operate. They also suspended their share buybacks — which account for the majority of their capital distributions — and aggressively reserved for potential losses. Importantly, large banks’ strength and scale allowed them to significantly support the economy.

In 2020, the nation’s largest banks increased their provision of credit by 10 percent, helping families, small businesses, large employers and the government. They accepted a massive surge in deposits and facilitated loans to nearly 850,000 small businesses through the Paycheck Protection Program. They also committed significant resources to communities across the country, creating or preserving more than 158,000 affordable housing units, and supported their nearly 758,000 employees by giving them extra time off, paying for child and elder care and providing economic incentives.

The largest banks have also been strong supporters of historically underserved communities. In addition to the work they are doing to promote lending in minority neighborhoods, they are investing in mission-driven financial institutions so that they can succeed and serve diverse and low- and moderate-income communities. From 2015 to 2020, the largest banks invested $9 billion in Community Development Financial Institutions, and they have also committed more than $500 million to Minority Depository Institutions, in some cases investing directly in the MDIs to support their long-term wellbeing.

The largest banks are committed to supporting their employees and the communities they serve. These institutions can and will continue to provide this support while distributing capital.

It’s important to remember that the benefits of buybacks and dividends to the economy go far beyond the shareholders. More than half of all U.S. households own stocks, either directly or indirectly, according to the Federal Reserve. Moreover, stock holdings are most concentrated among households headed by a retiree and dependent on dividends to meet their financial needs. Therefore, money returned to shareholders recirculates throughout the economy. It is our banks’ responsibility to those teachers, first responders, veterans and small businesses who invest in them to always use capital in the highest and most efficient way possible.

As Federal Reserve Chairman Jerome Powell said: “When a company buys back its shares or pays higher dividends, the resources do not disappear. Rather, they are redistributed to other uses in the economy. For instance, shareholders may decide to invest the windfall in another company, which may in turn make productivity-enhancing investments. Or they may decide to spend the windfall on goods and services that are produced by other companies, who may in turn hire new workers. In these ways, stock repurchases would also be likely to boost economic growth.”

The nation’s largest banks are committed to serving our country and to building an economic recovery that supports everyone. They have been through a real-life stress test during the past year and have shown that they are safe, strong, and are a key source of support for the economy. Government oversight of share distributions by the largest U.S. banks is rigorous, and ensures the continued strength of the financial system. The fact that banks have such excess capital to reinvest in the form of buybacks and dividends is a promising sign for the economy. It is now time to rely upon a normal process of assessing our institutions, and ensuring that they may support a durable, inclusive recovery.

 

Kevin Fromer is president and CEO of the Financial Services Forum, which represents the eight largest, most diversified U.S. banking institutions, and previously served as the Assistant Secretary of the Treasury for Legislative Affairs from 2005 to 2009. 






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