US banks: Plans for share buybacks before the downsizing of balance sheets
|Since March 2020, exceptional measures to bolster liquidity have resulted in a significant expansion of banks' balance sheets. Fearing that leverage requirements could hamper the transmission of monetary policy and affect banks' abilities to lend to the economy, the authorities have temporarily relaxed such requirements in the US (until 31 March) and in the eurozone (until 27 June).
In the US, although the temporary exclusion of reserves and Treasuries from leverage exposure (the denominator of the Basel ratio) is automatic for large bank holding companies, it is optional for their depository institution subsidiaries. The latter can only make use of the exclusion if they submit their dividend payment plans (including intra-group dividends) for supervisory approval. Although their balance sheets carry the bulk of the reserves of consolidated groups, as well as a substantial share of Treasuries, a large majority of subsidiaries did not take up this option last year. Earnings for the year and the ban on parent companies buying back shares have contributed to strengthening capital (Tier 1 capital, the numerator of the ratio), with the result that leverage ratios have deteriorated only slightly.
However, the Fed has now lifted the ban on share buybacks, for the first quarter of 2021 at least. Reserves and thus, other things being equal, banks' balance sheets could significantly increase again this year (with the Fed continuing to purchase securities at the rate of USD 120 bn per month and the Treasury's plans to reduce its holdings with the Fed by USD 800 bn). The ambitious capital distribution plans announced in recent days (share repurchases and dividend payments) could therefore require measures to slim down balance sheets in order to preserve leverage ratios and at the same time the scores for the systemic importance of certain groups.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.