Ever since the financial crisis, U.S. banks have been limited when it comes to dividend increases. However, as of 2021, they'll have a lot more freedom to set their own payouts. In this Motley Fool Live video clip, recorded on June 28, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why investors could see bank dividends rise more rapidly in the next few years.
Jason Moser: What do you think the natural segway with this latest round of tests? The conversation to me, at least for investors, it pivots toward something that banks are notorious for investments, dividends and buybacks. A lot of banks have more or less had the freedom to be able to continue those policies, save a few, but it does feel like now, even if it's not something that's necessarily greenlight, something that was already greenlit for many, this problem to me, it seems like this might result in accelerating dividend growth and share repurchases. What's your take there?
Matt Frankel: I think that's an understatement, and I'll tell you why. The stress test methodology in normal years was that if the banks pass the stress test, then they are to submit their capital plans for the Federal Reserve. We want to buy back $10 billion worth of stock. We want to pay X amount of dividends, and then they had to get the regulators stamp of approval on that. That's no longer going to be the case starting with this year. This was supposed to change last year but was put on hold because of the pandemic. Now they have what's called the stress capital buffer framework. This essentially says that as long as a bank keeps a minimum amount of capital prescribed by the Federal Reserve based on its riskiness, it can pay whatever dividends and buy back as many shares as it comfortably wants to.
Moser: That makes sense.
Frankel: This can be a big deal for banks, especially the ones that have really been limited by this, like Wells Fargo, for example. But now banks can do whatever they want. They don't have to get regulatory approval beyond meeting a certain capital buffer for how much they want to buyback. By the way, the reason you haven't seen a whole bunch of announcements about this yet from the individual banks, is the Fed asked of the hold off till Monday afternoon, which is today. If you're listening to this on iTunes or whatever, by the time you're hearing this, you might have noticed a bunch of press releases trickling out, and you might have been surprised that the size of them, and that's why because this year banks can really go for it when it comes to returning capital to shareholders.
