The $2.2 trillion stimulus bill recently passed by Congress sensibly restricts large companies getting help under that bill from distributing capital to shareholders or paying outsized executive compensation. These restrictions are not punitive toward shareholders and executives.
Rather they reflect the obvious: struggling companies should prioritize payroll and other operational costs until the COVID-19 crisis passes. Cash payouts to shareholders and executives are not a good use of precious capital right now. But that same rationale also applies to the nation’s largest banks, which are also getting substantial government help from the Federal Reserve.
Every dollar of capital a big bank distributes to shareholders and top executives is a dollar that does not support credit which struggling businesses and households need. Why hasn’t the Fed put banks under similar restrictions?
‘A sensible precautionary step’
Indeed, bank regulators of other developed economies, including the European Central Bank and the Bank of England, have asked their banks to suspend dividends, buybacks, and discretionary bonuses. As the Bank of England put it, these restrictions “are a sensible precautionary step given the unique role that banks need to play in supporting the wider economy…”
US Federal Reserve Chairman Jerome Powell gives a press briefing after the surprise announcement the FED will cut interest rates on March 3, 2020 in Washington,DC. (Photo by Eric BARADAT / AFP) (Photo by ERIC BARADAT/AFP via Getty Images)
Ironically, U.S. regulators are going in the opposite direction. A few weeks ago, they appropriately gave large banks permission to dip into supplemental capital buffers designed to give them the ability to expand their balance sheets in times of stress. But then they eased rules already in place that would have effectively required the biggest banks to stop shareholder payouts and discretionary bonuses once they dipped into those buffers. The regulators were concerned that big banks would be disincentivized to expand lending capacity if it meant they had to stop paying dividends and bonuses. But if that was the problem, the simplest solution would be to do what European and British regulators have done: just tell them they had to stop paying dividends and bonuses, whether they used their capital buffers or not.
To be sure, the Federal Reserve has been heroic when it comes to stimulus measures. The Fed has moved to directly support money market funds, the commercial paper market, corporate bond markets, asset backed securities, small business lending, mortgage finance, and government securities. I support these measures — but make no doubt, these programs are letting big banks off the hook by easing pressure on them to support distressed markets and help struggling borrowers, in addition to giving them access to virtually unlimited liquidity.
To its credit, the Fed has publicly and repeatedly directed the banks to support the credit needs of the real economy, but it is also creating incentives for them to do the opposite. Witness the additional capital relief it recently gave large banking organizations favoring risk free reserve deposits and U.S. Treasury investments over making business and consumer loans. (Two other U.S. bank regulators, the OCC and FDIC, did not join this rulemaking.)
Why is the Fed easing capital requirements?
When asked last week why the Fed has not moved to suspend cash dividends, Chairman Jerome Powell said it was unnecessary because banks are so “highly capitalized.” But if that is so, why has the Fed found it necessary to aggressively ease their capital requirements? The Fed has been particularly focused on something called the supplemental leverage ratio (SLR) which is a bare bones minimum requiring banks to fund themselves with a minimum of 3% equity (33/1 leverage) for most banks and 5% (19/1 leverage) for the biggest ones.
It has also eased stress test requirements, risk based capital requirements, and supplemental capital buffers. It has signaled that banks do not need to put any of their own capital at risk to participate in lending that is 100% backed by the government. Presumably this will include assets posted as collateral for non-recourse loans from the Fed. There are so many exceptions, I am beginning to wonder how the public will know whether banks are solvent or not.
Banks have special deals from the government like FDIC insurance and standing access to the Fed’s lending facilities not enjoyed by nonfinancial companies. But the government provides those benefits so that banks can be a source of strength in times of stress. While the biggest banks have voluntarily committed to suspending buybacks for the first half of the year, they continue to cling to their dividends and bonuses. The amount of capital they might release to shareholders is not insignificant.
Last year, the six largest banks distributed about $145 billion to shareholders, representing 12% of distributions by all S&P 500 companies. Of that amount, $38 billion was dividends, which could support about $600 billion in lending. The Fed says it wants banks to expand lending capacity, but the safest way to do that is to require them to retain this capital. Loosening capital requirements, the Fed’s preferred course, expands lending but also weakens banks’ financial stability.
To get through this crisis, our economy needs the combined efforts of government, business, and the financial system. To compensate their shareholders, banks could consider paying dividends in shares, which would not compromise their lending capacity. But they should suspend cash dividends and bonuses until this crisis is over. That would be a good way to prove to a cynical public that Wall Street is capable of putting the public’s interest above its own. Why the Fed does not require them to do so remains a mystery.
Sheila Bair is the former Chair of the FDIC and has held senior appointments in both Republican and Democrat Administrations. She currently serves as a board member or advisor to a several companies and is a founding board member of the Volcker Alliance, a nonprofit established to rebuild trust in government.
