Banks Pause Share Buybacks as Regulators Consider Raising Capital Requirements

Proposed new capital requirements for big banks are already having a chilling effect on stock buybacks, bank executives told The Wall Street Journal.

U.S. banking regulators issued proposed rules on Thursday that would put higher capital requirements on banks with $100 billion in assets or more, after a series of bank failures in March set off alarm bells about a possible widespread banking crisis. 

These rules would be among the strictest since the end of the 2008 financial crisis — and they will impact the value returned to shareholders through buybacks, according to the Journal. 

With the new rules, large banks may have to build a safety net of tens of billions of dollars in extra capital to ensure their stability, The Messenger reported. FDIC Chairman Martin C. Gruenberg said Thursday that big banks could see their capital requirements increase by 16% and smaller insured depository institutions by 9%. 

This means keeping more profits in their coffers instead of investing them or returning them to investors through dividends or buybacks, the Journal report said.

While all lending will be slowed by higher capital requirements, buybacks will be the first to grind to a halt. Bank analysts told the Journal that they can’t commit to repurchasing shares without knowing how much capital to hold on to.

Buybacks plummeted by 73.6% year-over-year in the fourth quarter of 2022, according to an S&P Global Market Intelligence analysis. Upward pressures on capital requirements and higher losses projected by the Federal Reserve stress tests at the time drove buybacks down, according to S&P Global.

Stock buybacks dropped sharply at the beginning of the financial crisis, New York Federal Reserve Board analysts found.