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I can't stop thinking about this misguided op-ed by @bankpolicy's Greg Baer.
So here's a thread about why it's wrong, and why policymakers should absolutely suspend bank dividends. https://www.ft.com/content/182e8048-09f0-45bc-8365-0c0ba63a92ac
So here's a thread about why it's wrong, and why policymakers should absolutely suspend bank dividends. https://www.ft.com/content/182e8048-09f0-45bc-8365-0c0ba63a92ac
1. The crux of Baer's argument is that regulators should not prohibit bank dividends because doing so would hurt banks' market values.
But why should regulators care about market value? Regulators should focus on solvency - which suspending dividends would bolster.
But why should regulators care about market value? Regulators should focus on solvency - which suspending dividends would bolster.
2. Baer contends that banks should be entitled to pay dividends if they pass the Fed's stress tests.
Not so. When economic conditions are far worse than the stress test's assumptions, the tests are no longer relevant.
Not so. When economic conditions are far worse than the stress test's assumptions, the tests are no longer relevant.
3. Baer cherry-picks data suggesting that U.S. banks are highly capitalized.
The op-ed conveniently omits that BPI's very first reaction to COVID-19 was to urge the Fed to gut binding capital requirements, which the Fed has, in fact, done.
https://bpi.com/actions-the-fed-could-take-in-response-to-covid-19/
The op-ed conveniently omits that BPI's very first reaction to COVID-19 was to urge the Fed to gut binding capital requirements, which the Fed has, in fact, done.
https://bpi.com/actions-the-fed-could-take-in-response-to-covid-19/
4. Baer treats bank dividends as inviolable.
But as I've noted, if banks MUST pay dividends, then common stock looks a lot like debt - and maybe doesn't warrant favorable capital treatment. https://twitter.com/Jeremy_Kress/status/1264916921805344768?s=20
But as I've noted, if banks MUST pay dividends, then common stock looks a lot like debt - and maybe doesn't warrant favorable capital treatment. https://twitter.com/Jeremy_Kress/status/1264916921805344768?s=20
5. Banks should be doing everything in their power to conserve capital. We know defaults and write downs are coming. Every dollar paid out in dividends today is a dollar less to absorb losses tomorrow.
For more, see @FinGregg: https://www.americanprogress.org/issues/economy/reports/2020/05/12/484722/bank-capital-coronavirus-crisis/
For more, see @FinGregg: https://www.americanprogress.org/issues/economy/reports/2020/05/12/484722/bank-capital-coronavirus-crisis/
6. As @STOmarova has said, it's disheartening that we even have to fight on this issue. In a well-governed financial system, the Fed would've suspended dividends months ago, and we'd be on to fighting bigger battles. /end https://twitter.com/STOmarova/status/1263520412690010112?s=20
