Final Test

Aiming to give their shareholders an early boost in 2011, the nation’s largest banks are looking to begin increasing payments on dividends, which have been either suspended or significantly reduced since the onset of the financial crisis in September of 2008. However, the Fed announced today that before any such moves take place amongst the largest U.S. banks, a “number of criteria” must first be met.

Under the guidance issued by the Fed, all 19 of the bank holding companies that participated in the Fed and Treasury-administered “stress tests” in 2009 will be required to submit capital plans—which include a demonstration of a bank’s ability to absorb losses under “adverse” economic conditions and its ability to comply with Basel III capital standards—by early 2011 for the Fed’s review. The capital plans will be submitted to the Fed, regardless of whether a bank plans to either raise dividends or repurchase stock shares. In addition, all government investments in a bank must be repaid or replaced with common or preferred stock before any dividend increases or stock repurchases take place. The Fed said it expects to begin responding to bank requests for such actions beginning in the first quarter of 2011.

The results of the Supervisory Capital Assessment Program (SCAP), or stress tests, which occurred during the spring of 2009 on the nation’s largest bank holding companies to predict “potential losses, the resources available to absorb losses, and the resulting capital buffer needed” based on various economic scenarios, revealed that ten of the 19 participating banks needed to increase their capital buffers for a combined total of $74.6 billion. SCAP was largely credited with boosting market confidence by providing a much-needed certification of the health of each bank’s balance sheet.

Federal Reserve—Revised Temporary Addendum to SR letter 09-4: Dividend Increases and Other Capital Distributions for the 19 Supervisory Capital Assessment Program Bank Holding Companies (PDF)

The View from November 3rd

The results of the 2010 mid-term elections are now in, meaning it’s time to begin analyzing what a new Republican House majority and a more narrowly divided Democratic Senate majority will represent for financial reform efforts in the 112th Congress.

Speaking to reporters this morning, House Minority Leader and likely the next Speaker of the House, John Boehner (R-OH), appeared to tone down previous calls by him and fellow GOP colleagues for a repeal of the Dodd-Frank Wall Street Reform and Consumer Protection Act, instead expressing his caucus’s intention to begin closely scrutinizing the implementation of the sweeping financial reform legislation through aggressive oversight. The GOP is expected to focus its sights on the following—the newly-created Consumer Financial Protection Bureau (CFPB); FDIC resolution authority that allows the agency to wind down failing financial institutions; and new rules governing financial derivatives. Republican gains in both the House and Senate will almost assuredly nix President Obama’s ability to usher through the Senate a potential nomination of Elizabeth Warren as a permanent director of the CFPB.

Despite the GOP’s renewed focus on overseeing and potentially repealing certain provisions of Dodd-Frank, a Democratic-controlled White House and Senate will still significantly hamper Republicans’ ability to pass any broad or sweeping changes. The most viable tool at Republicans’ disposal will be the power of the purse, as attempts could be made to prevent Dodd-Frank’s implementation through the withholding of federal appropriations to certain agencies. However, from a political standpoint, it remains to be seen whether the new House majority will risk being viewed by the electorate as proponents of Wall Street deregulation when looking ahead to 2012.

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