The Week Ahead: Banks await Fed's all-clear on dividends, buybacks

March 22, 2014 

After the test comes the reward. But for a reward to be meaningful, it should reflect the difficulty of the assessment.

On Thursday, the Federal Reserve declared 29 systemically important banks financially healthy. In the coming week, the central bank will decide which banks can pay out more to shareholders in the form of dividends or stock buybacks.

Having a government agency approve of the financial plans of a publicly traded company is a direct result of the bank bailouts of 2008 and subsequent Dodd-Frank financial reform law. Previously such decisions were left solely to a bank's management who were answerable to shareholders. But the irresponsible and unchecked behavior by banks a decade ago led to the taxpayer rescue and the subsequent annual financial stress tests.

The goal of Wednesday's pronouncement by the Federal Reserve is to ensure banks have plenty of financial cushion before they're allowed to pass out more money to shareholders. Two banks had their dividend increase plans rejected last year and three others had to make changes. This year may be different.

In addition to the 18 banks that have been subject to the Fed's financial blessing in years past,

a dozen more companies were judged this year. All passed last week's stress test except one: Utah-based Zions Bancorp. Now JPMorganChase, Wells Fargo, Bank of America and the rest must get the OK from the central bank before they increase their stockholder dividends, buy back stock or plan for an acquisition. But there's a disconnection. The just-passed stress tests assume the banks don't take any of those actions. Those are precisely the actions, however, that many are hoping to get the same Federal Reserve to approve in the coming week.

Tom Hudson, financial journalist, hosts "The Sunshine Economy" on WLRN-FM in Miami, where he is the vice president of news. He is the former co-anchor and managing editor of "Nightly Business Report" on public television. Follow him on Twitter HudsonsView.

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