New York Fed and Treasury Tell Banks to Hold Cash
By Larry Doyle on March 11, 2010 at 1:00 PM in Banks, Economy, Sense on Cents (Larry Doyle blog), U.S. Treasury
How often have Americans heard politicians screaming at banks for not providing credit? How often have those same politicians and bank regulators informed us that they are working to have banks inject money into the economy to support Main Street?
Regrettably, America deals with this pandering and posturing from our political leaders and regulators all too often. While Americans are being told one thing, what are the regulators telling the banks? Hold cash.
I am not shocked, but certainly disappointed, that American financial periodicals failed to run this story detailing these recommendations from our bank regulators. The London based Financial Times highlights this bombshell in writing, Regulators Tell U.S. Banks to Hold Funds: >>>>
US regulators have told banks not to increase dividends or buy back shares until political and economic uncertainty surrounding the industry dissipates, in a move that will delay by months the return of capital to shareholders.
Some investors in financial stocks argue that winners of the credit crisis, such as JPMorgan Chase and Goldman Sachs, have profitable businesses and strong balance sheets and should consider raising dividends or buying back stocks.
Executives at the two companies have talked in public and with regulators about the possibility of returning cash to investors after taking action to conserve resources during the turmoil. But they say they are not in a rush to go ahead, especially if their watchdogs oppose such moves. “Regulators are gun-shy at this stage, partly because they fear that giving the green light to healthier banks to return cash to investors would prompt demands from more troubled institutions to do the same,” one senior Wall Street executive said.
People close to the situation said government agencies, led by the New York Federal Reserve and the Treasury, told banks they would have to wait until the economic and legislative picture became clearer before returning funds to investors.
In a letter sent in December, officials reminded financial groups they would have to meet criteria, such as “stress-testing” their balance sheets and achieving sustainable profitability, before releasing funds to shareholders. The New York Fed and Treasury declined to comment.
Mike Mayo, an analyst at CLSA, said: “The word banks have used the most … is ‘fragile’.
Economic growth is predicated on the flow of money, otherwise known as the velocity of money. With news like this, we should expect that velocity to remain at a trickle.
The burden will remain on the Fed to keep its Fed Funds rate low so these banks can continue to recover. The burden should also remain on the regulators and bank executives to not allow the Fed liquidity to walk right out the front door of these banks in the form of big fat bonuses.
LD
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