Fed Stress Tests Reveal European Bank Bombshell

NEW YORK (TheStreet) -- Come March, U.S. bank investors will be praying that bailed-out lenders Bank of America(BAC) and Citigroup(C) can win the Federal Reserve's approval to improve on their puny dividends after years of building up capital reserves, selling divisions and posting inconsistent profits.

In Europe, however, lenders such as Banco Santander(SAN) , Banco Bilbao Vizcaya Argentaria(BBVA) , Intesa Sanpaolo and Deutsche Bank(DB) are hanging on to large payouts without doing any hard work.

Struggling investment banks such as Societe Generale(SCGLY) , UBS(UBS) , Credit Suisse(CS) and Barclays(BCS) , meanwhile, are in the process of either reinstating high-yielding payouts or forecasting big dividend increases to shareholders.

Some are even paying out special dividends.

French investment bank Natixis, which needed a 35 billion-euro toxic-asset guarantee from conglomerate BPCE in 2009, said this month it would sell a 12 billion-euro stake in BCPE and deliver a 2 billion-euro special dividend. The bank now targets a 50% payout ratio.

At a time when eurozone banks are gorging on emergency European Central Bank loans as a way to handle asset sales, writedowns, rising non-performing loans, messy politics in countries such as Italy and France, and an overall economy that's expected to contract in coming years, the dividend payouts of lenders across Europe are a reminder of what put banks into a state of crisis five years ago.

Thankfully, in the U.S., a mix of public pitchforks and a central bank with control over the purse strings of large banks is preventing what could be a contagion of reckless management in Europe from spreading to our shores.

Consider a comparable hypothetical to Banco Santander's 10%-plus dividend using AIG(AIG) . In 2012, the insurer repaid government loans and the Federal Reserve's sold most of the toxic assets it bought from the company at the peak of the crisis.