3 min read . Updated: 26 Mar 2021, 02:14 PM IST The Federal Reserve said temporary limits on dividend payments and share buybacks will end for most banks after June 30, following the completion of annual stress tests to determine their resilience to a hypothetical downturn.
“The banking system continues to be a source of strength, and returning to our normal framework after this year’s stress test will preserve that strength," Randal Quarles, the Fed’s vice chairman of supervision, said Thursday.
The move is a vote of confidence for big banks from the Fed, which placed restrictions on bank payouts last summer, citing the need to conserve capital during the coronavirus-induced downturn. It initially barred buybacks and capped dividends so that they would not exceed a bank’s recent profits.
The central bank has repeatedly extended the restrictions on dividends while it allowed buybacks to resume in the first quarter of 2021, though banks still can’t return to shareholders more than they have been making in profit over the past year. The aggregate dividends and repurchases can’t exceed the average quarterly profit from the four most recent quarters.
In a sign of the uncertainty facing the industry and the economy, the Fed required big banks to go through two rounds of stress testing last year. It said after the latest round in December that U.S. banks remain strong enough to survive the coronavirus crisis but warned that a prolonged economic downturn could saddle them with hundreds of billions of dollars in losses on soured loans.
Before the Fed imposed its payout restrictions last summer, the biggest U.S. banks, including Bank of America Corp. and JPMorgan Chase & Co., had voluntarily halted share buybacks through the second quarter of 2020. Buybacks are the main way U.S. banks return capital to shareholders.
Some officials such as Janet Yellen, who pressed for tougher restrictions on bank payouts before she became Treasury secretary, have said banks are now in a strong enough position to distribute dividends to shareholders and buy back stock.
“Financial institutions look healthier now, and I believe they should have some of the liberty provided by the rules to make returns to shareholders," Ms. Yellen said in Senate testimony Wednesday.
The annual stress tests were introduced following the financial crisis of 2008-09, when the U.S. government bailed out some of the largest financial institutions. The tests are intended to ensure that banks have enough capital to continue lending during a possible economic downturn. Results for this year’s test will be released by July 1, the Fed said Thursday.
The Fed imposes limits on payouts for banks deemed on their stress tests to have insufficient capital to absorb losses. In its announcement Thursday, the Fed said any bank that falls below any of its minimum risk-based requirements in the coming test will remain subject to the additional restrictions for three more months, through Sept. 30. A firm that remains below the capital required by the stress test at that time faces even stricter distribution limitations under Fed rules.
This story has been published from a wire agency feed without modifications to the text.w
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