Friday, June 10, 2011

Fed Seeks to Control Dividend Payments of Big Banks

Here's another ingenious way for the government to make sure banks fall in line and buy enough "safe investments", i.e. Treasury securities. The Fed wants to approve each year the capital structure of all banks, with $50 billion of assets or more. If a bank's capital structure does not meet with the Fed's approval it will not be allowed to pay out dividends.

Marketwatch has the details:
The Federal Reserve on Friday proposed having big banks with more than $50 billion in assets submit annual capital plans for review. The Fed would evaluate each institution's plan to make capital distributions, such as hiking dividends or repurchasing stock, as part of the capital plan review. In situations where the Fed rejects a bank's capital plans, the institution would need to receive approval from the central bank before issuing dividends or making other capital distributions.

1 comment:

  1. All the Fed really needs to do is extend its own accounting rules to its member banks. If a bank experiences a capital shortfall, we can always assume it will be made whole at some future time by QEx, and can rightfully assume the future dividend payment will be made. Therefore, the bank can turn the dividend line item on its books into a negative liability in the amount of the shortfall, and let that deferred asset restore its capital position. Wallah...solvent.

    You can thank me later Alvarez, although you rightfully deserve credit for the idea.