The big question in the banking world, which nobody wants to raise at the moment, is: Will the credit defaults caused by the corona crisis (unemployment, company bankruptcies) be so high that the banks’ equity capital will be eaten up and that the financial system will collapse as a result? Well, the European and German supervisors have currently decided to make this problem optically disappear, in which, according to the latest decision, the banks do not have to show deferred loans in their books until the end of September due to default (the “legal balance sheet fraud”, as Markus Krall put it). Problem hidden, but not solved! And the banks in the USA?
Fed with whip for banks
The US Federal Reserve announced tonight (after a positive bank stress test, ohhh miracle, once again everything is fine) that important banks in the USA are no longer allowed to buy back their own shares in the third quarter (i.e. from next week). This is an important point.
Especially US companies have been buying back their own shares on a gigantic scale for years in order to push the share price. And the fewer shares are freely available on the market, the more the dividend per share increases, which of course makes each individual share more valuable. But it is above all through extensive share buybacks that companies lose money. Money that is probably better kept in equity at the moment. As a reserve for the rainy days that are likely to come now. When millions of consumers and companies may no longer be able to service credit rates.
And the Fed also decided tonight that major US banks will not be able to increase their dividends at will in the third quarter. They may continue to pay dividends, but only according to a formula based on the bank’s actual earnings. The reasons for these measures by the Fed are clear. The institutions should keep as much money as possible in equity and build up reserves for the upcoming loan defaults!
SEC with carrot
The Fed is currently throwing further regulation at the banks in the USA. On the other hand the US Securities and Exchange Commission (SEC), which as an authority can be steered by the White House (unlike the Fed), is giving the banks a carrot to chew on. Because the SEC announced tonight that the Volcker Rule will be relaxed. It should ban banks from gambling on their own account after the 2008 financial crisis.
A good idea, because it makes future bank failures more unlikely! But now this rule will be relaxed a little bit. From October 1, banks will be allowed to offer financial services to hedge funds and private equity firms again. They can also subscribe to shares in certain venture capital funds. The roulette table will thus become more accessible to banks again. Support from the Trump administration. So that the banks can compensate for zero interest rates and impending loan defaults by generating more income from these areas?