Banks Are On A Roll

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What's going on?

Big US banks are set to return lots more money to their shareholders than Wall Street expected after, late on Wednesday, the US Federal Reserve (the Fed) gave them permission to do so.

What does this mean?

Among other things, the Fed acts as a regulator of US banks. As such, it assesses how safe banks are based on how much spare cash they keep on hand (for example, to fund lots of customer withdrawals at once). For years after the 2008 financial crisis, US banks were forced to build up their stockpiles of cash by keeping hold of most of their profits.


Gradually, banks were allowed to return a greater proportion of their profits to shareholders, in the form of dividends and by buying back their own stock (which leaves remaining shareholders owning a greater proportion of the company). But on Wednesday, for the first time since the financial crisis, the Fed cleared most big banks to return virtually all of their profits to shareholders which was a positive surprise for bank shareholders (bank stocks jumped about 3% on Thursday!).

Why should I care?

For markets: Bank stocks are having a very good week. (tweet this)

For one, bonds around the world have sold off this week, which pushes up bond yields, a.k.a. interest rates (why? click here). As interest rates go up, banks can charge more to lend money which boosts their profits. On top of that, the Fed has now said that banks can return more of their profits to shareholders. Thats a winning combination for shareholders of banks.


The bigger picture: A healthy banking system is good for the economy.

When banks are in trouble, as they were during the financial crisis, they rein in their lending in order to reduce their risks. Thats bad for the economy, because many companies dont get to borrow money in order to do things like buy more equipment and hire more workers. Conversely, when banks are healthy they are much more willing to lend money, which supports economic growth.

Originally posted as part of the Finimize daily email.

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