Washington — The Federal Reserve has given Wall Street banks the green light to resume billions of dollars of stock buybacks, noting that the industry has held up well during the coronavirus pandemic.
While lenders remain barred from boosting their dividends in the first quarter, the Fed’s decision is a partial but significant win for banks that have been eagerly awaiting permission to boost capital distributions. The central bank revealed the looser restrictions on Friday, as it also disclosed that firms performed well in a second round of 2020 stress tests that assessed how the industry has navigated the Covid-19 tumult.
“The banking system has been a source of strength during the past year, and today’s stress test results confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy,” Fed vice-chair for supervision Randal Quarles said in a statement. The tests showed that none of the largest banks fell beneath their capital minimums under the Fed’s hypothetical stress scenarios.
JPMorgan said on Friday it would resume buybacks in the first quarter, and that its board had approved up to $30bn in repurchases, though the timing of using that full amount would be subject to “various considerations”. Shares of the four biggest US banks jumped more than 2% in late New York trading after the Fed’s announcement.
Even as buybacks resume, dividends will remain unchanged through to the end of March, capped at whatever each bank returned in the second quarter of 2020. The Fed said banks’ payouts to shareholders in the first quarter of 2021 can’t exceed their average quarterly income for 2020.
Fed officials had said their decision on shareholder payouts would be based on the results of the stress tests, which were run because annual exams conducted earlier in the year didn’t capture Covid-19. For the first time, the agency launched a do-over, using new scenarios based on the current turmoil.
JPMorgan and other large US banks have already indicated they’re ready to restart buybacks in the first quarter. But Democratic legislators and consumer groups have been urging the Fed to force banks to stockpile capital as long as the economy continues to sputter. Fed governor Lael Brainard has opposed her agency’s efforts this year to allow limited capital distributions, and she voted against the Fed’s decision to relax the limits further for next year.
“For several large banks, projected losses take capital levels very close to the minimum requirement, in the range where banks tend to pull back from lending, even before payouts,” Brainard said in a statement on Friday. “Prudence would call for more modest payouts to preserve lending to households and borrowers during an exceptionally challenging winter.”
The US is undergoing another wave of the illness, with infection rates and death tallies both spiking. But the economy has so far limped along, doing better than many analysts predicted.
In other jurisdictions — including Europe and the UK — regulators have begun relaxing the restrictions they’d put in place on bank dividends.
Based on the new distribution policy, the six biggest US banks could buy back as much as $11bn of shares in the first quarter of next year, assuming fourth-quarter earnings come in at the levels analysts estimate.
The buybacks can bring total payouts to 100% of banks’ average net income over the previous four quarters. The firms already distribute about 30% of their profit through dividends.
The new limit still could put a cap on banks’ payouts, as they’ve built up capital buffers over the past year and could afford to eat into that excess by distributing more than they earn in coming quarters.
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