One of the interesting differences between European and US banks after the 2008 financial crisis was the strength with which regulators forced them to address capital concerns. In general the US regulatory system forced substantial improvements in capital on US banks. European regulators, under substantial political and industry pressure, were much less aggressive in this area. It has been my thesis that the European approach which on the surface seemed to be helpful to the banking industry instead placed the European banks at a long term competitive disadvantage to the US banks. Taking the pain of capital raising upfront positioned the US banks for growth as well as lending to support their local economies. European banks faced instead a long term challenge of providing the credit that would help the European economy grow.
It was therefore with interest that I read an article in the Financial Times that suggested there may be a softer approach in the US as banks face the impact of COVID-19 on their capital. It was noted that US banks have paid almost twice as much in dividends as they earned in the first quarter of 2020. Of course it is possible to pay more dividends than earned for a short period of time but it is not a sustainable strategy. It is hoped that this is only a temporary occurrence and the article suggests that the FDIC is already focusing on the long term consequences of this non-sustainable dividend policy. But the key lesson is capital is critical to banking success – especially if banks will be able to provide the credit to the real economy to address the challenges of COVID-19, environmental degradation and social/economic/racial inequality.
