The Comprehensive Capital Analysis and Review and the New Contingency of Bank Dividends
46 Seton Hall Law Review 43 (2016)
Georgia State University College of Law, Legal Studies Research Paper No. 2015-35
68 Pages Posted: 3 Nov 2015 Last revised: 9 Jan 2019
Date Written: October 24, 2015
Historically, bank regulators have restricted bank dividends as part of a larger effort to preserve banks’ capital and make them more able to withstand losses. In today’s dynamic banking markets, the formulaic and rigid ways by which regulators have traditionally policed dividends have become anachronistic. Against this background, the Federal Reserve Board has attempted to update and reinvigorate dividend regulation through two regulatory reforms: (1) the Comprehensive Capital Analysis and Review (CCAR) program and (2) the Dodd-Frank Act stress testing program.
This Article explores the important practical and theoretical implications that result from these regulatory reforms. As a practical matter, the ability of banks to make distributions — the most basic method by which equity investors obtain returns on their capital investment — has been made contingent and contestable to an unprecedented degree. For example, over the past two years the Federal Reserve Board has required Bank of America, Citigroup, and Goldman Sachs to adjust their dividend plans. In a privatized system of banking, restrictions on the ability of stock investors to obtain returns potentially complicate bank funding.
As for regulatory theory, these reforms are noteworthy because they unite, for the first time, what had previously been two separate sub-systems of the bank regulatory framework: the formal-mandatory dimension of bank regulation, exemplified by the formulaic, automatic application of traditional dividend restrictions, and the informal-discretionary dimension of bank regulation, exemplified by the context-specific regulation of “unsafe and unsound practices” and stress testing. These reforms provide further evidence of a broader trend in financial regulation towards greater emphasis on hypothetical and conjectural future stress scenarios. Finally, this Article links the CCAR program to the existing “risk regulation” literature that has developed in the environmental, health, and safety regulatory arenas. Although the risk regulation model has not yet taken hold in financial regulatory scholarship, the CCAR program provides a clear example of its relevance to the regulatory tasks of bank supervisors. By viewing the program through the risk regulatory lens, the Article frames future research questions concerning the utility of applying the risk regulatory model to risk-taking financial institutions.
Keywords: CCAR, capital adequacy, Federal Reserve Board, CCAR, safety and soundness, dividends, bank regulation, financial regulation, bank supervision, comprehensive capital analysis and review, stress testing, dodd-frank, risk regulation
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