Yes, Mr. President,
Banks Are Lending
President Trump ordered a review
of financial regulations.
by Aude Guerrucci
the party line: Banks aren’t lending nowadays because the regulatory
burden they face is too onerous. And that is hurting the economy and
Articulating this view, President Trump has vowed to slash
financial regulations to fix the
“Frankly, I have so many people, friends of mine, that have nice
businesses and they can’t borrow money,” he said in early February.
“They just can’t get any money because the banks just won’t let them
borrow because of the rules and regulations in Dodd-Frank,” the Wall
Street reform law of 2010.
Anecdotes can be compelling, of course. So many people with nice
businesses who can’t borrow money. That sounds very bad.
actual figures tell a different story.
column from Gretchen Morgenson examining the world of finance
and its impact on investors, workers and families
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Indeed, a look at recent bank results shows that lending among the big
institutions is rising, not falling. In the fourth quarter of 2016,
the most recent period, Bank of America, Citigroup, J. P. Morgan and
Wells Fargo all reported increases in their average loan figures.
these increases were greater than others, of course. J. P. Morgan’s
average core loans
were up 12 percent,
year-over-year in the quarter, while
at Citigroup loans grew by 1
Wells Fargo’s loans rose by 6
percent, as did Bank of America’s, once you remove the dwindling
Countrywide loan portfolio from the calculation.
are not lending less.
they could be doing more lending, says the veteran bank analyst
Richard Bove, of Rafferty Capital Markets. And higher volumes of
lending — of course, assuming the loans are appropriate — would help
create jobs and fuel economic growth.
no doubt that Congress’ regulatory response to the financial crisis of
2008, which was largely fueled by reckless mortgage lending, tightened
the rules for banks. Chief among them was a requirement that these
institutions set aside greater amounts of capital to cover potential
losses. That was justified, but it is crimping lending.
there are other reasons these institutions are relatively restrained
in their lending, Mr. Bove said.
cannot make the case that bank loans have not grown as a result of
Dodd-Frank,” he said. “The only case you can make is that Dodd-Frank
has been a depressant on bank loans because of the increase in capital
ratios and the need to put more money into liquidity.”
drags on loan growth, Mr. Bove said, include rising interest rates,
which reduce the value of the securities these banks hold. Increasing
interest rates contributed to diminished common equity positions at a
group of banks Mr. Bove follows.
managers cannot control interest rates. But they can control the
amount of dividends they pay out to shareholders, and the amount of
stock they buy back in the open market. And generous distributions to
shareholders by bank officials are a big factor in diminishing the
money left over for making loans.
President Trump met with business
leaders and Wall Street executives in the State Dining Room at
the White House on Feb. 3.
Al Drago/The New
buybacks and lush dividends come out of a bank’s retained earnings,
also its source for increased lending. And Mr. Bove characterizes
these payouts as financial engineering, pursued by bank executives
interested in making their stocks perform better. He criticizes this
practice, because while dividends and buybacks are good in the
short-term, fewer loans will translate into reduced long-term earnings
power at a bank.
no question that stock buybacks and high dividend payments eat into
banks’ common equity and slow down their ability to make loans,” he
said in an interview. “This also slows down the secular growth rate of
amounts being paid out are considerable. During 2016, Wells Fargo
returned $12.5 billion to shareholders through common stock dividends
and share repurchases net of stock issued to employees. And in the
most recent quarter, J. P. Morgan returned $3.8 billion to
shareholders. That included $2.1 billion of net stock buybacks.
Representatives for the banks declined to comment for this column. But
officials at these institutions often contend that buying back stock
and paying rich dividends are ways of returning excess capital to
their shareholders, who are entitled to that money.
presentation in 2014, for example, Marianne Lake, J. P. Morgan’s chief
financial officer, described the bank’s capital allocation decisions:
“The first priority is to support appropriate business growth and to
provide a healthy dividend payout with the potential to increase over
time,” she said.
Shareholders love their dividends and stock buybacks, of course, so
none are likely to complain about these practices. Both help to keep
share prices aloft as well.
buying back shares and paying rich dividends to shareholders
diminishes a bank’s common equity. And among 18 large banks that Mr.
Bove follows, 14 showed declines in common equity in the fourth
quarter of 2016 as a result of increased interest rates, buybacks and
dividends. The combined decline in equity totaled almost $18 billion;
in his view, that means the banks have lowered their ability to lend
by $250 billion.
sure, none of these banks are paying out all of their excess capital
in dividends or stock buybacks. And that leaves them with a much
fatter cushion for bad times.
Bove said that he had recently spoken with some bank executives who
are considering paying out all the growth they report in retained
earnings or common equity. “This would effectively negate any
contribution that profits would make to retained earnings,” Mr. Bove
wrote in a recent research note. “The combination of further interest
rate increases and large buyback programs would accelerate the decline
in common equity and the ability of banks to make loans.”
nothing new for the private sector to complain that regulations are
cutting into their businesses. Given that the Dodd-Frank law runs to
over 1,500 pages, undoubtedly some of its rules could be eliminated
without bringing back reckless lending. This is especially true for
smaller institutions. One of Dodd-Frank’s bigger errors was to require
smaller banks that had played no role in the crisis to ramp up their
compliance duties as well. This was unfair and, yes, burdensome.
said he believes that some of the regulations should be reversed, but
the elements he cited are not those that Republicans are focusing on.
Republicans in the House and Senate cannot even agree with each other
as to what should be deregulated,” he pointed out in a recent research
note. “In the Senate, they want a big-government approach to change
the structure of the industry. In the House, there is a desire to get
rid of irritating amendments to Dodd-Frank. Nothing is going to get
Bove is right, that might be a good outcome. But this much is clear:
The next time someone tells you that a wide swath of financial
regulations needs to be reversed because they are crimping bank
lending, you can tell them they’ve got only part of the story.
A version of this article appears in print on February 19, 2017, on
Page BU1 of the New York edition with the headline: Yes, Mr.
President, Banks Are Lending.
© 2017 The
New York Times Company