Why are banks still paying dividends?

A close look at some bank dividend yields show numbers that are in the double digit range. If these banks are capital constrained and seeing mounting loses there does not seem to be a good reason to continue to pay-out these high dividends. Over five times the Fed funds rate! Three or more times Libor!

Either these banks are extremely cheap on a temporary basis or management has something else in mind. Note that the lower rates and the Fed allowing the banks to use its balance sheet further pushes the question of what is going on in the banking sector. Why would the Fed not use its bully pulpit to get banks to shore up their capital instead of paying off shareholders? Think of it, the Fed is lending at Fed funds and providing its balance sheet so shareholders could be paid instead of making loans off the increased capital base.

An answer could be with the view to stop short selling. The actions taken by the SEC restricts naked short selling for 19 financial institutions. Investors can no longer engage in or selling short a stock which has not yet been borrowed. When you short and borrow the stock, the seller is on the hook for the dividend which means the cost of borrowing is higher when the dividend yield is high. If you keep dividend yields high you punish any short sellers. Nevertheless, the key issue is whether banks are shoring up capital and not paying out yield to shareholders.