People pass the Federal Reserve building on March 19, 2021 in Washington, DC.
Olivier Douliery | AFP | Getty Images
Banks will be able to accelerate dividends and repurchases to shareholders this year, but not before June 30 and as long as they pass the current round of stress tests, the Federal Reserve announced on Thursday.
The largest Wall Street institutions were limited on the basis of revenue in their ability to do both during almost the past year as a precautionary measure during the Covid-19 pandemic.
The Fed had said at the end of last year that it would start allowing regular disbursements in the first quarter of 2021, so Thursday’s announcement postpones that date.
“The banking system remains a source of strength and returning to our normal structure after this year’s stress test will preserve that strength,” said Vice President for Supervision Randal Quarles in a statement.
Banks’ shares rose after hours due to the news, with Wells Fargo and JP Morgan Chase up about 1%.
The lifting of restrictions only applies to institutions that maintain adequate capital levels, as assessed through stress tests. Under normal circumstances, capital distributions are guided by a bank’s “stress capital buffer”, a capital measure that each bank must carry based on the risk of its assets.
Income-based measures were put in place as a safeguard to ensure that banks had sufficient capital while the pandemic devastated the United States economy.
Any bank that fails to reach the target will have the restrictions of the pandemic era reimposed until September 30. Banks that are still unable to meet the required capital levels will face even stricter limitations.
The financial sector is one of the leaders in the stock market this year, with the group up 14.7% year-to-date on the S&P 500. People’s United, Fifth Third and Wells Fargo lead the banking segment.
The announcement came a day after Treasury Secretary Janet Yellen, who chaired the 2014-18 Fed, said she would be comfortable with lifting restrictions on dividends and repurchases.
At a congressional hearing on Wednesday, Yellen said he agreed with the decision to suspend capital disbursements and resume them.
“I objected before, when we were very concerned about the situation that banks would face with the share buyback,” said Yellen. “But financial institutions look healthier now, and I believe they should have some of the freedom provided by the rules to give back to shareholders.”
Banks repurchased only $ 80.7 billion of their shares in 2020, with most of them occurring before the pandemic arrived.