Should banks be in such a rush to pay back government injections of capital?
That might seem an odd question given that just months ago, talk of a punitive tax on bonuses in particular made throwing off the government yoke seem a no-brainer. But, Breakingviews says, that furor has passed for now. Still, it argues, there are downsides to redeeming government aid.
For starters, it’s cheap capital. The banks currently jostling to hand it back are paying just 5 percent a year for it, a better rate than they’d get borrowing the money elsewhere. Putting that to work ought to add extra juice to earnings. That’s not to be sniffed at, especially during a recession, Breakingviews says.
But paying back capital provided by the Treasury Department under its Troubled Asset Relief Program can mean diluting shareholders, it adds. Banks are falling all over themselves to raise new capital: Bank of New York Mellon, BB&T, Capital One and U.S. Bancorp have sold a combined $7.7 billion of new stock. At JPMorgan Chase, the chief executive, Jamie Dimon, has unequivocally said his bank did not need more equity to pay back the government.
Breakingviews takes BB&T as an example. The North Carolina-based bank makes money, and it passed the government’s bank capital stress test with flying colors, so it doesn’t need to raise more. Yet its $1.5 billion share sale will dilute shareholders by 12 percent or so, Breakingviews says. And it has just cut its dividend, as many peers have in recent months, it notes.
As it happens, BB&T might have struggled to earn enough to cover its payout, the publication suggests. Even so, that adds up to a lot for shareholders to give up simply to free banks of government interference that amounts, at present, to limiting bonus payments for their top five executives and 20 highest-paid earners to one-third of salary, which isn’t itself restricted, Breakingviews argues.
There’s always the chance that lawmakers will decide to impose additional constraints, the publication concedes. And even if they don’t, potential employees may be shy about joining financial institutions that have received bailout funds, it adds. That could mean that paying back the government is indeed a good idea. But bank chiefs should do more than rely on received wisdom to justify doing so, Breakingviews says."