WASHINGTON — A top Federal Reserve Board official said Wednesday the central bank will be vigilant in how it assesses whether large U.S. banks can pay dividends to shareholders.
"We are going to be paying very careful attention to capital distributions going forward, and we will expect banks' board of directors and senior management, who have primary responsibility for such decisions to do the same," said Patrick Parkinson, director of the division of banking supervision and regulation for the Fed, in a speech to the Exchequer Luncheon.
In retrospect, Parkinson said bank supervisors, including the Fed, had not paid "sufficient attention" to firms' capital distribution activities.
Pre-crisis, he said, there was "shortsightedness" on the significant distributions of capital made by the largest banks in the form of stock repurchases and dividends.
The 19 largest U.S. banks paid more than $43 billion in dividends in 2007, and then another $39 billion in 2008.
The Fed released a proposal last week that would require banks with more than $50 billion of assets — 35 institutions — to submit a capital plan each year. Those firms would submit capital plans starting in January and would be notified by the Fed on March 15 each year.
Parkinson said the Fed's role as the primary regulator is to "counter over-optimism among firms."
Initiatives by the Fed, as well as the recently proposed capital plan, he said, will provide supervisory oversight that will force firms to project their capital needs and resources, and their capital distribution plans.
Banks will be required to hold Tier 1 capital of 5% based on current regulatory risk weights until Jan. 1, 2016, which is roughly the time Basel III capital requirements would kick in.
"This oversight may require us to deliver some blunt and unwelcome communications to firms' board of directors and senior management and to follow up forcefully to ensure that issues are being properly resolved," said Parkinson. "But that is our job."
Parkinson said the Fed would evaluate firms based on the "rigor and comprehensiveness of the analysis" of capital plans submitted to the central bank.
So, if banks aren't able to identify and measure risk, that means they can't credibly estimate its uses and sources of capital over its planning period, he said. The Fed would also look at each company's capital levels and composition before making a decision.
The agency, he said, could opt not to approve a capital distribution plan if a firm was unable to maintain minimum capital levels or it was considered an "unsafe or unsound practice."
Responding to recent concerns by banks on higher capital requirements, Parkinson acknowledged that "capital levels can be … too high," as some former regulators like Paul Volcker have suggested, and could create greater incentives for regulatory arbitrage.
"We do share concerns that have been expressed forcefully by banks in the United States," said Parkinson. "We have to very carefully asses what the potential impact would be and we have been assessing."
Fed Gov. Daniel Tarullo angered bankers and spooked markets by suggesting two weeks ago that the largest banks could face a capital surcharge of up to 7%. But most sources said it is more likely to be around 3%. Parkinson said that a final agreement has not been reached, there is a growing consensus among international regulators what the surcharge should be. The Basel Committee on Banking Supervision is expected to put out its proposal in July for comment.
