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US Banks Must Relaunch Buy-backs Program to Stay in Business

US dollar bills and stock price chart.

Vladislav Ginko, an author of this OP-ED story, is a former vice-rector of Moscow-based Jewish University. He worked as a Corporate Finance lecturer at New York-based Touro University. Currently, he is an analyst and lecturer at Russia’s leading state think-tank, Presidential Academy.

The US banks are the backbone of the American financial system and they may face a risk of the deficit of the capital in three months. The adopted $2.3 trillion coronavirus relief bill has little to handle this looming issue.

Indeed the widespread closure of economic activities in the US will indisputably lead to insolvency among a critical mass of people and business entities. Neel Kashkari, the head of the Federal Reserve Bank of Minneapolis, projects that the US shutdown may last 18 months. There are signs that some problems with cash withdrawals may have already arisen at some US banks.

This issue has come up at the very beginning of coronavirus advent to the US, and WSJ has reported on 18th of March that “some branches of U.S. banks and credit unions have run low on cash as customers make big withdrawals, prompting regulators to warn that they are putting their money at risk.” Earlier, on 16th and 17th, two days in a row, the US Treasury Steven Mnuchin has tried to calm the public that there’s no need to take a bunch of cash out of the bank: “nobody has to pull money out of banks.”

The month after that the problem has not disappeared and because of it FDIC has recently released a video with a clear message: “Forget the mattress! Keeping large sums of cash at home is risky. The best place to protect your money is in an FDIC-insured bank where it’s safe and sound.”

The problem aggravates since all moments in the economy are intertwined. The lockdown because of the COVID-19 pandemic has led to the situation when companies become insolvent at a faster rate and start stopping the payout on their liabilities.

US finances under the pressure

This has already created a 10-million army of fresh unemployed in the US. They start withdrawing their last savings from the banks putting under the pressure of the US financial stability. The current world economic disaster may lead to massive government-led bail-outs, as Peter Altmaier, Germany’s economic minister has recently envisioned.

Is this case unavoidable for the US banking sector? The answer lies also in the analysis of U.S. banks’ steps in the epoch of low oil prices and coronavirus. Many of them have preferred to halt buybacks of their own shares, and this looks like a quite bad strategy.

The US banks have actually refused to follow its classical tactics they’ve used to implement in calm times and what’s enabled to keep the banking sector soaring. Actually, the major driver of equity demand has been buybacks. Not only US banks have shunned this practice, but the non-banking sector has also done this too. It only frees up more marginal calls in the US everywhere in the world since the US corporate shares have been considered as a good collateral.

Margin calls ruin businesses, and the banks of the United States face more claims about insolvency from their clients. This leads to breaking capital requirements and US F.R.S. may start figuring out how to nationalize US key economic actors. The US banks must relaunch their buy-backs program to save their business. 

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