| Big U.S. banks could go on a stock-buyback spree. Should they? Buybacks sometimes get skeptical looks from investors. What, there wasn't a better use for the money? Not so for banks. In the years since the 2008 financial crisis, when banks had to raise tons of new capital, many investors have been salivating to get it back. The Federal Reserve's annual stress tests, due later today, are a big event for buyback boffins. They reveal how much additional capital a bank needs to stay above minimum regulatory requirements in a worst-case scenario. Anything beyond that is, to some shareholders, ripe for return. That future "excess" could grow, too, if several tweaks under consideration by banking regulators are adopted. Large banks tracked by Barclays analysts could see their total above-target capital go from about $80 billion to nearly $140 billion, the analysts estimated in a recent note. Banks have long highlighted a profit metric that benefits from capital returns: return on tangible common equity. This measures net income as a percentage of equity capital. Less equity as a result of buybacks means the same profit delivers a higher return per share. That can reward lenders who do less, you know, lending. Many loans require a lot of capital in case they go bad. But many fee businesses, like managing money or advising boardrooms, don't. For a while, this was a sensible shift. Investors wanted banks to take less credit risk anyway. Near-zero rates meant loans weren't lucrative. And Wall Street could earn fees selling loans to the market. Now, though, interest rates are higher. And banks are losing both lending and fee business to pools of private money, where new borrowers like data-center builders have been going. So investors might want to focus on banks that see a productive future use for the capital they don't strictly need today. JPMorgan Chase Chief Executive Jamie Dimon said last year: "Excess capital is not wasted capital; it's earnings in store." At its recent investor day, JPMorgan suggested an alternative framework: If a use of capital returns more than it cost to raise it, it can add value for shareholders, even if it is lower than the bank's overall return on tangible common equity.
Buybacks shouldn't go away. Banks continually generate capital through their earnings. Unless they return some, including via dividends, it can pile up faster than even an ambitious banker can deploy it. But banks that are laser-focused on shrinking may not be ready to take on new competitors. Or to take advantage of what a more liberal regulatory regime might also allow them to do, like major acquisitions. Remember, money can't actually burn a hole in your pocket. | 
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