Excess Capital, Buybacks and Shareholder Remuneration Illusion and Reality

This paper challenges the widespread market narrative that equates share buybacks with genuine shareholder remuneration or value creation. Through a comprehensive economic, managerial, and regulatory lens, the analysis demonstrates that short-term mechanical adjustments to earnings per share (EPS), return on equity (ROE), and market prices are purely cosmetic illusions that leave the immediate theoretical value of financial portfolios neutral. Focusing on the banking sector, the study revisits capital adequacy frameworks under the Dividend Discount Model (DDM) and Risk Appetite Framework (RAF), showing that ‘substantive excess capital’ is typically lower than conventional regulatory estimates suggest due to unquantified, latent risks and model limitations. Grounded in the Modigliani-Miller theorem, the paper argues that corporate value is uniquely driven by an institution’s underlying capacity to generate earnings through core operational performance. Consequently, buybacks must be evaluated strictly as discretionary capital management tools based on opportunity cost, rather than as structural remuneration mechanisms.