Tougher Federal Reserve stress tests forced six U.S. banks to scale back proposals for doling out more cash to shareholders, while failing Deutsche Bank’s US unit on “qualitative” grounds:
Twenty-eight other firms can proceed with their original proposals to boost stock buybacks and dividends after the Fed found they’d still hold enough capital to weather a hypothetical economic shock.
As the FT notes, given the disappointing results on Thursday for some banks, the industry’s overall payout ratio — capital distributed as a proportion of earnings — was expected to remain roughly unchanged from last year at about 95 per cent.
Even with the more conservative capital plans, Goldman and Morgan Stanley fell below some required capital thresholds. Yet the Fed gave the less punchy payouts the go-ahead anyway. Officials said weakness in the stress test partly reflected the accounting impact of landmark tax reforms that Mr Trump signed into law last year. Randal Quarles, the Fed’s regulatory chief, said they had created “one-time challenges”.
The results overall were weaker than last year, although Fed officials noted that the regime had become stricter this year. They also said the tax reforms reduced banks’ capital ratios just as the stress tests were beginning because the cut in the corporate tax rate from 35 per cent to 20 per cent cut the value of deferred tax assets. Furthermore, Trump reforms eliminated a beneficial tax treatment that had enabled banks to smooth their earnings by carrying losses forwards or backwards from periods of crisis.
And here are select banks’ capital plans announced in response:
