The Impact of Federal Reserve Stress Tests on Dividend Policies of Major Banks

Recent Federal Reserve Stress Test Results

The recent Federal Reserve stress test results, disclosed by June 30, 2024, highlighted the strength of major banks' balance sheets. Despite some concerns about the stress capital buffer not reflecting business progress, banks like Morgan Stanley and Citigroup demonstrated robust financial health, with Morgan Stanley facing a 6.0% Stress Capital Buffer.

"First, our recent stress test results. The year-over-year increase in our stress capital buffer does not seem to reflect the strategic evolution of our business and the continuous progress we've made to reduce our stress loss intensity, which the Federal Reserve had recognized in our last three tests." --- (GS, earning call, 2024/Q2)

"The Federal Reserve has indicated that it will disclose CCAR capital plan supervisory stress test results by June 30, 2024." --- (BAC, sec filing, 2024/Q1)

"The Firm anticipates that the Federal Reserve will disclose summary information regarding the Firm's stress test results by June 30, 2024." --- (JPM, sec filing, 2024/Q1)

"On June 26, 2024, the Board of Governors of the Federal Reserve System released its CCAR 2024 results, as a result of which Morgan Stanley expects to be subject to a Stress Capital Buffer (SCB) of 6.0% from October 1, 2024 to September 30, 2025." --- (MS, press release, 2024/06/28)

"The recent stress tests again showcased the strength of our balance sheet." --- (C, twitter, 2024/07/12)

Historical Changes in Dividend Policies Post-Stress Tests

Major banks have consistently prioritized sustainable dividend policies post-stress tests. JPMorgan Chase emphasizes maintaining dividends even in stress environments. Morgan Stanley prioritizes dividends in its financial strategy. Wells Fargo, Bank of America, and Goldman Sachs have all announced significant dividend increases, reflecting their commitment to returning capital to shareholders.

"And then the dividend, I think, we are always going to want to keep it in that like sustainable, and also sustainable in a stress environment. So that continues to be the way we think about that." --- (JPM, earning call, 2024/Q2)

"It's just not something we're going to think about in the short term. The reality is we've got our forced hierarchy, the forced hierarchy is dividend first, investing in clients as appropriate, achieving operating returns against that second." --- (MS, earning call, 2024/Q2)

"allows us to serve our customers' financial needs and we remain committed to prudently return excess capital to our shareholders. As we previously announced, we expect to increase our third quarter common stock dividend by 14% to $0.40 per share, subject to the approval by the Company's Board of Directors at its regularly scheduled meeting later this month. We repurchased over $12 billion of common stock during the first half of this year, and while the pace will slow, we have the capacity to continue repurchasing stock." --- (WFC, earning call, 2024/Q2)

"In addition, we also announced our intent to increase our quarterly dividend 8% upon board approval." --- (BAC, earning call, 2024/Q2)

"We will dynamically deploy capital to support our client franchise, while targeting a prudent buffer above our new requirement. Our board also approved a 9% increase in our quarterly dividend to $3 per share beginning in the third quarter, a reflection of our priority to pay our shareholders a sustainable growing dividend and our confidence in the increasing durability of our franchise. In conclusion, we generated solid returns for the first-half of 2024, which reflects the strength of our interconnected businesses and the ongoing execution of our strategy." --- (GS, earning call, 2024/Q2)

Impact on Capital Requirements and Dividend Capacity

Major banks are adjusting their capital requirements and increasing dividends following Federal Reserve stress tests. Citigroup and JPMorgan Chase announced dividend hikes after SCB results, while Wells Fargo and Goldman Sachs emphasize ongoing evaluations of capital needs. Bank of America focuses on maintaining a buffer while deploying earnings into dividends and buybacks.

"of which we expect to reduce our capital requirements over time. And as a reminder, we announced an increase to our common dividend from $0.53 per share to $0.56 per share following the SCB result." --- (C, earning call, 2024/Q2)

"The preliminary SCB, which is up from the current requirement of 2.9%, results in a 12.3% standardized CET1 ratio requirement, which goes into effect in the fourth quarter of 2024.And finally the firm announced that the Board intends to increase the quarterly common stock dividend from $1.15 to $1.25 per share in the third quarter of 2024." --- (JPM, earning call, 2024/Q2)

"And so we've got lots of flexibility. And each quarter, we'll go through the same process we go through every quarter, which is thinking about sort of where the capital requirements are going to go, looking at all the different risks that are out there across the spectrum, whether it's rates or other, and then looking at what we're seeing from client activity, and then we'll make a decision on the pacing of it." --- (WFC, earning call, 2024/Q1)

"Capital Management We determine the appropriate amount and composition of our capital by considering multiple factors, including our current and future regulatory capital requirements, the results of our capital planning and stress testing process, the results of resolution capital models and other factors, such as rating agency guidelines, subsidiary capital requirements, the business environment and conditions in the financial markets." --- (GS, sec filing, 2024/Q1)

"We're earning a nice amount of dollars and we'll deploy it back in the dividend and the buybacks. Well, our job is to maintain -- our view is we will maintain a 50 basis point type of management buffer to whatever the requirements are." --- (BAC, earning call, 2024/Q2)

Investor Reactions to Dividend Policy Changes

Investors have shown positive reactions to banks' dividend policies, with Morgan Stanley focusing on wealth management payouts, Goldman Sachs emphasizing sustainable dividend growth to drive shareholder returns, and Wells Fargo facing negative market reactions due to broader concerns impacting confidence.

"The idea has been to pay out the wealth and investment management business in the form of the dividend." --- (MS, conference, 2024/06/10)

"Wells Fargo stock has suffered short term negative market reactions from concerning news, but these issues may also have long term implications for the company's share price. Failure to address these issues at a fundamental level may further erode the market's confidence in the company." --- (WFC, AGM, 2024/04/30)

"We're going to continue to sustainably grow our dividend. We think that drives a lot of TSR for our shareholders, and it's a pretty clean and clear story." --- (GS, conference, 2024/05/30)

Regulatory Perspectives on Dividend Policies

Regulatory bodies play a crucial role in shaping dividend policies of major banks. Wells Fargo and Citigroup emphasize the importance of meeting regulatory expectations and obtaining necessary consents, while JPMorgan Chase highlights collaboration with regulators. Regulatory pressures and the risk of further actions significantly influence banks' dividend decisions.

"While we see clear forward momentum, it's up to our regulators to make their own judgments and decide when the work is done to their satisfaction. Progress has not been easy, but tens of thousands of my partners at Wells Fargo have now worked tirelessly for years to deliver the kind of change necessary for a company of our size and complexity, and we will not rest until we satisfy the expectations of our regulators and the high standards we have set for ourselves. While we have made substantial changes and have meaningfully improved our control environment, the industry operates in a heightened regulatory oversight environment, and we remain at risk of further regulatory actions." --- (WFC, earning call, 2024/Q2)

"While we're developing and seeking OCC consent for our Resource Review Plan, dividend amounts above that would require the OCC's non-objection.Now these dividends are intercompany payments that are made from CBNA ultimately to the parent Citigroup." --- (C, earning call, 2024/Q2)

"Regulators rely on us to step forward.I want to point out that we worked hand in hand with the Federal Reserve, the FDIC and the U. S. Treasury." --- (JPM, event transcript, 2024/05/21)

"what I've said in the past. Regulatory pressures on banks with longstanding issues such as ours is high, and until we complete our work and until it is validated by our regulators, we remain at risk of further regulatory actions." --- (WFC, earning call, 2024/Q1)

"We take this feedback from our regulators very seriously and we're committed to allocating all the resources necessary to meet their expectations. Now, turning back to the quarterly results." --- (C, earning call, 2024/Q2)