Banks Dividends Are Coming Back – How Will The Fed Pull This Off?

The Fed announced today:

“The Federal Reserve on Friday announced it has completed the Comprehensive Capital Analysis and Review (CCAR), its cross-institution study of the capital plans of the 19 largest U.S. bank holding companies.

As a result of the CCAR, some firms are expected to increase or restart dividend payments, buy back shares, or repay government capital. The Federal Reserve on Friday will discuss the reviews and its decisions with firms that requested a capital action. All 19 firms will receive more detailed assessments of their capital planning processes next month.”

Now here’s what I’m wondering:   Remember what some banks claimed with TARP – that they didn’t “need” the money, but rather, that the Government made them take it, because, after all, if only the sick firms had gotten funds, then everyone knows that they are sick!  Now, let’s ignore the fact that some of the TARP recipients took the “we didn’t want the money, they made us take it,” line.  With this dividend resumption, we’re gonna get a pretty good idea at who got the green light and who got the red light to resume dividend repayments!

How will the market react when it sees which banks do not resume dividend payments?  Is there any other conclusion except for “The Fed thought you weren’t sound enough to give capital to shareholders” ???  Of course, the Fed addressed this:

“It is important to note that there are a number of reasons why firms participating in the CCAR may not be making capital distributions this quarter. For example, a firm may not have requested approval of any such action, Federal Reserve supervisors may have believed a requested distribution was too high at this time and could weaken the firm’s ability to weather adverse economic conditions, or supervisors may not have been comfortable with the capital planning process underlying the request. Firms may resubmit capital proposals each quarter, with their prospects for an answer of no objection dependent on their responses to any concerns raised during the CCAR.”

I’m skeptical that this “explanation” will suffice.  It seems likely to me that Mr. Market will draw its own conclusions.  In other words, any bank that doesn’t increase its dividend or buyback stock will be assumed to have “failed” the test.  The Fed is trying another angle, too, from the detailed report:

“In contrast to the 2009 SCAP, the Federal Reserve does not intend to disclose any firm specific results of the CCAR”

I don’t know if that means they will not be giving out the details of the stress tests for each bank, or that they will not be releasing a public list of who “passed,” or both.   As I mentioned above, I don’t see how they can say “Banks X,Y, Z were approved for capital distributions, and banks A,B,C were denied,” without Mr. Market drawing conclusions about the adequacy of capital at the banks that were denied.  The Fed’s paper has all sorts of disclaimers regarding this – elaborating on the quote above, about why firms may be denied in their requests, and how not all firms even submitted requests – but in my opinion, the results will speak for themselves.

The Fed will notify the individual banks of the results by March 21st.  This should be interesting.  I mean, if GS (for example) puts out a press release about raising their dividend, and MS puts out a press release about raising their dividend, won’t people worry why the other guys are NOT upping their dividends?

Let’s see how this one plays out…

-KD

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