US banks paid nearly twice as much in dividends as they earned

The Federal Deposit Insurance Corporation said it is monitoring US banks’ dividend policies after they declared payouts totalling almost twice their earnings in the first quarter, eroding capital cushions as the coronavirus crisis took hold.

The country’s 5,100 lenders and savings institutions declared dividends of $32.7bn for a quarter when they made profits of $18.5bn — 70 per cent less than the same period the year before, the FDIC said.

“We’re certainly looking at the banks’ payments of dividends and monitoring what’s going on there,” FDIC chair Jelena McWilliams told reporters, adding that the FDIC had “supervisory tools” which it could deploy to make sure banks “are not risking their balance sheets or risking safety and soundness” with excessive payouts.

Provisions for loan losses wiped almost $52.7bn from the industry’s profits in the first quarter, the FDIC said, versus $13.9bn a year earlier. An 8 per cent increase in loan balances, the biggest year-on-year jump since 2008, put further pressure on banks’ capital ratios since the ratios are capital as a percentage of total assets.

Despite tentative signs of recovery, including a better than expected 18 per cent rebound in retail sales for May and stronger than expected jobs data, Ms McWilliams said it was too soon for regulators to row back exceptional measures they introduced at the start of the crisis. These included allowing borrowers to pause loan payments without the banks having to declare the loans as troubled.

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US banks’ insistence on paying dividends through the coronavirus crisis has become a contentious topic, after European authorities put a stop to payouts and some former American regulators recommended the US follow suit.

The Federal Reserve will either greenlight or block dividends for the biggest US banks on June 25, when it announces the outcome of their annual stress tests. Morgan Stanley boss James Gorman last week said there was no reason why banks like his that are earning more than their dividends should have to halt payments.

Ms McWilliams said on Tuesday that the banking industry had proven to be “a source of strength for the economy” during the pandemic. “Bank capital and liquidity levels remain strong, asset quality metrics are stable, and the number of ‘problem banks’ remains near historic lows,” she said.

So-called problem banks are institutions in danger of failing unless corrective measures are taken. The number of such banks rose from 51 to 54 during the quarter, the FDIC said, marking the first quarterly increase since 2011, when the number peaked at 888.

Twelve institutions with assets below $2bn had fallen below “the requirements of well-capitalised” banks and would have to take corrective actions, it added.

The FDIC oversees institutions ranging from Wall Street giants like JPMorgan Chase to small community banks and is the agency responsible for making depositors whole if a bank goes under. It can seize institutions that get into trouble.

Ms McWilliams warned of challenges to come. “With the Federal Reserve cutting the fed funds rate to near zero in March, the low interest rate environment combined with the economic downturn will present challenges to the industry over the near to midterm,” she said.