Tags: bank | stress | test | BofA

Layers and Players: Condition of the Largest Banks

By    |   Friday, 13 Mar 2015 08:23 AM

With Congress out of town for one of its many "district work periods," the financial crisis beat is eerily quiet. The Federal Reserve is allowing the largest banks to increase dividends and buy back stock, and next week the Federal Open Market Committee is expected to equivocate some more about when, if ever, it is going to raise the fed funds rate, something Wall Street doesn't want it to do.
 
Bloomberg's Michael Moore said that it was positive that Citibank passed the stress test, but it would still have to be careful, because the Fed changes the test from year to year. He added that JPMorgan Chase, Goldman Sachs and Morgan Stanley had to use the "mulligan," which means that they resubmitted their plans within the week in order to qualify. Moore noted that there is no stigma to doing this, because it is "part of the process" and it gives banks an opportunity to ask for as much as possible in terms of returning capital to shareholders, so the mulligan is a strategic tool.
 
In an interview with former Rep. Barney Frank, D-Mass., CNBC's Steve Liesman stressed the importance of a higher volume of bank lending and seemed to accept that bank capital levels have improved under the Dodd-Frank Act, as the bank regulators keep asserting, and they suggested that the stress test scenarios are too stringent. However, in recent testimony before the Senate Banking Committee, Stanford's Peter Conti-Brown warned that three times a low level of capital is still a low level of capital.
 
Peter Eavis of the New York Times suggested that a slip up by Bank of America "will most likely raise new questions about its ability to comply with new regulations intended to make banks safer." Apparently, weeks after last year's test, BofA discovered it had overstated its capital by $4 billion. And BofA was given only a "provisional" pass this year after the Fed found weaknesses in internal controls. Ironically, Eavis reported that the bank plans to buy back $4 billion worth of stock.
 
The article includes a video of former FDIC Chairman Sheila Bair, who is on the board of Santander, a bank that failed the stress test, telling CNBC that those who have been saying banks have too much capital are wrong, because the "leverage ratio," which is the plain measure of the amount of capital to assets, without risk weighting, shows that "there's still a lot of leverage in the system." She estimated the leverage ratios at the largest banks at 4 to 5 percent, "which isn't a lot of common equity to fund your balance sheet." Bair praised the Fed for going forward with this, but said, "We still have a ways to go with the very largest complex institutions."
 
Remarkably, Liesman followed with a suggestion that the regulators are going too far in regulating the ability of healthy banks to pay dividends and buy back stock. Bair responded that in the period before the 2008 crisis, the regulators had this power but refrained from using it, so now the pendulum is swinging the other way, and she would rather have that. "It is what it is."
 
(Videos can be found, respectively here, here and here.)

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Robert-Feinberg
With Congress out of town for one of its many "district work periods," the financial crisis beat is eerily quiet. The Federal Reserve is allowing the largest banks to increase dividends and buy back stock.
bank, stress, test, BofA
538
2015-23-13
Friday, 13 Mar 2015 08:23 AM
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