Payday could be coming for US bank investors.


It’s getting closer to business as usual for the largest banks in the US when it comes to payments to shareholders.

The Federal Reserve is now poised to end the special restrictions put in place during the pandemic on the ability of most large banks to buy back shares and pay dividends as of June 30, depending on the results of the annual stress tests. . Banks must pass the minimum capital levels established by that exam. Typically, under the Fed’s stress test regime, banks that do not meet its requirements have the ability to adjust their balance sheets and face restrictions that escalate based on what is below their minimums. However, for now, a bank that does not meet the minimum stress test remains subject to current restrictions, which limit buybacks based on final net income, for an additional quarter before the regular regime takes effect. .

That decision comes after the Fed did something that could in theory hamper bank payments, which was to let the waiver for Treasuries and central bank reserves expire on measures of how leveraged big banks are. That means the big banks are now approaching their leverage limits. However, it is crucial that the Fed’s stress capital buffer regime does not include a stressed leverage component. Therefore, that potential limitation might not take into account payment restrictions for now.

Assuming this year’s stress test isn’t dramatically stricter than recent years, a significant chunk of cash can be unlocked. Analysts at Goldman Sachs Group estimate that the largest banks have the capacity under current rules, before the June 30 relaxation, to buy back about $ 22 billion worth of shares in the second quarter. Once the rules are relaxed, they estimate that buybacks could almost triple in the second half of the year, to $ 63 billion, or about 3% of the market value of those banks. Consumer lenders that have recovered strongly thus far may have some of the greatest potential: Goldman analysts expect the largest buyback in the second half of 2021 as a percentage of market value among Capital One Financial’s big banks.

The degree to which banks take advantage of that capacity is the next question. In theory, under the stress capital buffer regime that began last year but was not actually used due to the pandemic, buybacks could come at a faster rate than in the past. However, if loans recover strongly, risk-weighted assets will grow much faster than they have, and banks will buy mainly government bonds, which could put pressure on capital ratios. The rapid rise in the price-to-book ratio of bank stocks could also discourage buybacks.

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