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Will Trump Allow Banks to Dramatically Boost Their Dividends?

By Motley Fool Staff – Nov 27, 2016 at 7:06AM

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One element of the Dodd-Frank Act that could go away under the incoming Trump administration is the Federal Reserve’s veto power over bank capital plans.

Donald Trump's campaign promise to "dismantle" Dodd-Frank could have wide-ranging impacts on the bank industry. One way in particular that it could dramatically change things for banks is by taking away the Federal Reserve's veto power over bank capital plans.

As The Motley Fool's John Maxfield and Gaby Lapera discuss in this segment of Industry Focus: Financials, this could free up banks like Bank of America (BAC 1.96%) and Citigroup (C 1.61%) to as much as double their quarterly payouts.

A full transcript follows the video.

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This podcast was recorded on Nov. 21, 2016.

John Maxfield: The one final thing that could really help banks, in terms of this conversation around deregulation, these stress tests that we've talked about on the show multiple times in the past, that banks have to go through every year and see if they're able to survive an economic downturn akin with the financial crisis -- or even worse, when you look at the hypothetical scenarios that they're applied --

Gaby Lapera: Sorry, I'm just laughing because you said that all so fast!

Maxfield: Yeah, sorry.

Lapera: But continue, the stress tests?

Maxfield: Part of the stress tests is the Federal Reserve under the Dodd-Frank Act -- and that's where the power to stress-test banks comes from -- the Federal Reserve was given a veto power over bank capital plans. What that means is, when a bank wants to raise its dividend or increase the amount of shares it buys back, it has to basically asked the Federal Reserve for permission to do so. Under Hensarling's proposal, they basically get rid of that veto power. What that would mean for a bank like Bank of America, who has had its dividend request denied, I believe, two times over the past six years by the Federal Reserve, that would give Bank of America, effectively, the ability to double its dividend in 2017 or 2018, but still pay out the same percentage of its earnings each year as Wells Fargo, JPMorgan Chase does. Basically, the same is true for Citigroup, which also has had its dividend hikes denied on multiple occasions over the past few years. So when you add all of these things together -- and, again, all these things are big ifs and we don't know exactly how this is all going to go down -- if these things go through, banks are going to make a ton more money.

Gaby Lapera has no position in any stocks mentioned. John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool owns shares of Wells Fargo. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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