Fed says banks will have to wait until June 30 to start issuing buybacks and bigger dividends
Banks will be able to accelerate dividends and shareholder buybacks this year, but not until June 30, provided they pass the current round of stress tests, the Federal Reserve said on Thursday.
During the Covid-19 pandemic, the largest Wall Street institutions were precautionary limited last year due to their income-based ability to do both.
The Fed announced at the end of last year that it would allow regular payouts from the first quarter of 2021, which is why Thursday’s announcement is postponing this date.
“The banking system remains a source of strength and the return to normal after this year’s stress test will maintain that strength,” Randal Quarles vice chairman of supervision said in a statement.
Bank stocks rose in after-hours trading on the news, with Wells Fargo and JP Morgan Chase gaining around 1%.
The lifting of the restrictions only applies to institutions that maintain an adequate level of capital as assessed by the stress tests. Under normal circumstances, capital distributions are based on a bank’s “stressed capital buffer,” a measure of the capital that any bank should hold based on the risk of its holdings.
The income-related measures were put in place to ensure banks had enough capital as the pandemic hit the US economy.
Any bank that does not meet the target will be subject to the pandemic restrictions again until September 30th. Banks that are still unable to achieve the required level of capital will have to adhere to even stricter constraints.
The financial sector is one of the market leaders in the stock market this year. The S&P 500 has increased by 14.7% since the beginning of the year. People’s United, Fifth Third and Wells Fargo have led the banking sector.
The announcement comes a day after Treasury Secretary Janet Yellen, who chaired the Fed from 2014-18, said she would like to lift restrictions on dividends and buybacks.
At a congressional hearing on Wednesday, Yellen said she agreed to both the decision to suspend and resume capital payments.
“I used to be against it when we were very concerned about the situation banks would face if they buy back shares,” said Yellen. “But financial institutions look healthier now, and I believe they should have some of the freedom that the rules on return to shareholders offer.”
Banks bought back just $ 80.7 billion of their shares in 2020, with most coming before the pandemic broke out.