The US Federal Reserve is preparing guidelines for supervisors to use in assessing whether banks are strong enough to boost dividends or buy back shares, a person familiar with the matter said.
The Fed plans to release the guidelines as soon as this month, said the person, who declined to be identified because the plan hasn’t been made public. The Fed is seeking to standardise procedures for supervisors to evaluate inquiries from banks, the person said.
“It’s significant because it will give a level of guidance and understanding that the Federal Reserve did not use before,” said Thomas Sowanick, chief investment officer and co-president of Omnivest Group LLC in Princeton, New Jersey, which has $1 billion under advisory. “It really demonstrates the enhanced oversight that the Fed has.”
Concerns that bank capital was under pressure from souring loans prompted Fed officials in February 2009 to issue a letter to its regional supervisors telling them banks “should reduce or eliminate dividends” when earnings decline or the economic outlook deteriorates. The new guidelines may show the Fed’s confidence in banks’ health is being restored.
“It signals that the Fed is comfortable with the capitalisation the industry has or will have in the future,” said James Chessen, chief economist for the American Bankers Association in Washington. “It’s a very good sign.”
‘Top priority’
Bank stocks rose, helping drive the Standard and Poor’s 500 Index to the highest since September 2008, after the Wall Street Journal reported that the Fed may start letting healthy banks raise dividends. The six largest US banks currently pay quarterly dividends totalling 51 cents, down from $2.49 in 2007.
Wells Fargo & Co Chief Financial Officer Howard Atkins said last month that an increase is a “top priority” for the bank. JPMorgan Chase & Co Chief Executive Officer Jamie Dimon said he was “reasonably hopeful” the firm will be able to raise its payment in 2011’s first quarter and that regulators were open to the idea.
“But they are going through their own calculations, and they obviously want to look at the global issues I think before they make any final determinations,” Dimon said on October 13.
The US Treasury Department forced Charlotte, North Carolina-based Bank of America Corp and Citigroup Inc to slash their quarterly payments to no more than a penny as a condition of receiving an additional $20 billion of bailout money in late 2008 and early 2009. The banks had gotten $25 billion a few months earlier.
‘Winners and losers’
Bank of America cut its dividend to 1 cent a share, the lowest since predecessor BankAmerica Corp eliminated its payout between 1986 and 1988 because of loan losses. Citigroup cancelled its dividend altogether in February 2009. It repaid $20 billion to the Treasury last December and is still partially owned by the government.
Not all bank balance sheets have recovered enough from the worst financial crisis since the Great Depression to start increasing payouts, said Paul Miller, a bank analyst at FBR Capital Markets Corp. in Arlington, Virginia.
“There are still a lot of banks out there that should be retaining as much capital as possible,” Miller said. “You’re really picking winners and losers here if you’re allowing some banks to increase dividend payments.”
Basel requirements
Some banks may not be able to raise their dividends as they prepare for higher capital requirements. At a meeting in Basel, Switzerland, in September, regulators reached a compromise that more than doubles capital requirements for the world’s banks, while giving them as long as eight years to comply. US regulators may require an additional buffer beyond the 7 per cent Tier 1 common ratio proposed by the Basel Committee on Banking Supervision, according to analysts.
Most of the biggest lenders repaid their government rescue funds last year. Goldman Sachs Group Inc, Morgan Stanley and JPMorgan, all based in New York, were among banks that paid back the government in June 2009, while Bank of America and San Francisco-based Wells Fargo returned funds later that year.
