US Banks Boost Dividends and Buybacks Post-Stress Test, Yet Regulatory Capital Requirements Set to Rise

US bank deposits have recovered to their highest level in fifteen months, bolstering the nation’s financial institutions against a persistently elevated tide of unrealized losses. Positive results from the Fed’s latest stress test of 31 large US banks further eased concerns about banking system fragility last week and heralded an increase and dividends and buybacks from several key firms. Adjustments to banks’ capital requirements will now be handed down by the Fed based on their performance in the stress test. Further increases could be on the way as a result of a phasing-in of the Basel III Endgame program next year, but revisions to an initial proposal show that the requirements might be less stringent than originally projected. 

With less than two weeks until large US banks begin reporting earnings, financial sector shares have been exhibiting improved performance. Impressive quarterly results at Jefferies pushed the company’s shares to an all-time high last week. That may foreshadow a continued recovery in depositories’ investment banking and capital market segments.

Related ETFs: SPDR S&P Bank ETF (KBE), SPDR S&P Regional Banking ETF (KRE)

Deposits across all US commercial banks jumped to their highest level in more than a year in the week to June 19, reaching $17.612 trillion. Bank deposits tracked by the Federal Reserve have now risen YoY for fifteen consecutive weeks, increasing by 1.6% in the most recent period. The current level of deposits is almost $400 billion above a 2023 trough, recouping roughly 41% of the net -$981 billion in deposits that flowed out of commercial banks between April 2022 and May 2023. That drought, combined with the unprecedented size of unrealized losses on bank balance sheets, ultimately led to three of the four largest US bank failures in history last year. However, with short-term interest rates on track to be diminished by some degree throughout the remainder of 2024, concerns regarding deposits and banks’ beaten down bond portfolios should continue to ease.

As we noted in a June breakdown of the FDIC’s most recent Quarterly Banking Profile (QBP), unrealized losses being carried by US depositories in the first quarter were equivalent to a hulking $516.5 billion. The primary catalyst behind skyrocketing markdowns on banks’ securities portfolios, and what would ultimately doom Silicon Valley Bank to failure, was an aggressive ratcheting up of both short and long-term interest rates that heavily discounted the valuations of mortgage-backed securities, US Treasuries, and other bonds that were acquired when rates were much lower (and therefore, bond prices much higher). Despite yields on 10-year and 30-year US Treasury bonds spiking by 72 and 67 basis points between the end of Q1 2023 and the same quarter in 2024, respectively, the unrealized losses held by US banks were virtually unchanged in those periods. Not only have a number of…