Returning cash to investors is now a bad thing, according to U.S. regulators these days.
Cash should be hoarded and kept for management to play with:
Shareholders may have to wait for months to retrieve capital after U.S. regulators told banks not to increase dividends or buy back shares amid political and economic uncertainty surrounding the financial industry, the Financial Times reported on Wednesday.
“Regulators are gun-shy at this stage, partly because they fear that giving the green light to healthier banks to return cash to investors would prompt demands from more troubled institutions to do the same,” one senior Wall Street executive told the Financial Times.
Sources familiar with the situation said government agencies, including the New York Federal Reserve and the U.S. Treasury, told banks they would have to wait until the economic and legislative landscape became clearer before banks could follow through with plans to return funds to investors, the newspaper said.
We understand how regulators are afraid that some banks might be hit with further surprise losses, and thus could need more cash in the future than they anticipate. But… at the same time… it’d be nice if investors could take cash out of their own companies.
Regulators’ concerns are misguided. If certain companies end up giving too much cash back to shareholders, and require more cash suddenly at some point in the future, investors can always recapitalize these troubled banks again. That’s what issuing shares is for.
So it’s ridiculous that an entire industry be restricted from paying back its owners (shareholders) just to avoid a few potential cash shortfalls.
If anything, making it hard for investors to get their money back from banks will only increase banks’ cost of equity capital. It will also increase the likelihood that banks will deploy cash in stupid ways chasing lower-return opportunities, since they will have too much just sitting around.
A higher cost of equity capital combined with lower returns on equity is a fast track to destroying shareholder value across the entire industry as per basic finance. Which means the U.S. is taking all this risk to banks’ market valuations, just to avoid a few potential capital shortfalls that could be easily solved with future share issues on a case by case basis. Hopefully this restriction ends as soon as possible. You don’t attract much-needed future capital to a financial system by locking the doors once money has arrived.