People walk past the Federal Reserve Building on March 19, 2021 in Washington, DC.
Olivier Douliery | AFP | fake images
Banks will be able to accelerate dividends and shareholder buybacks this year, but not until June 30 and provided they pass the current round of stress tests, the Federal Reserve announced Thursday.
Wall Street’s largest institutions have been revenue-constrained in their ability to do both for nearly the past year as a precautionary measure during the Covid-19 pandemic.
The Fed had said late last year that it would begin allowing regular disbursements in the first quarter of 2021, so Thursday’s announcement delays that date.
“The banking system continues to be a source of strength and returning to our normal frame after this year’s stress test will preserve that strength,” Vice President of Supervision Randal Quarles said in a statement.
Bank stocks were up after hours of trading on the news, with Wells Fargo and JP Morgan Chase up about 1%.
The lifting of restrictions only applies to institutions that maintain adequate levels of capital assessed through stress tests. Under normal circumstances, capital distributions are guided by a bank’s “capital stress buffer”, a measure of capital that each bank must carry based on the risk of its holdings.
Income-based measures were put in place as a safeguard to make sure banks had enough capital while the pandemic swept through the US economy.
Any bank that does not meet the target will have pandemic-era restrictions reimposed until September 30. Banks that cannot yet meet the required capital levels will face even more stringent limitations.
The financial sector is one of the leaders in the stock market this year, and the group is up 14.7% to date on the S&P 500. People’s United, Fifth Third and Wells Fargo have led the banking space.
The announcement comes a day after Treasury Secretary Janet Yellen, who chaired the Fed from 2014 to 2018, said she would feel comfortable with lifting restrictions on dividends and buybacks.
In a congressional hearing on Wednesday, Yellen said he agreed with the decision to suspend capital expenditures and resume them.
“I was opposed before when we were very concerned about the situation that banks would face regarding share buybacks,” Yellen said. “But financial institutions look healthier now, and I think they should have some of the freedom that the rules provide to generate profits for shareholders.”
Banks bought back just $ 80.7 billion of their shares in 2020, with most of it coming before the pandemic.