It is approaching normal for the largest banks in the United States when it comes to payments to shareholders.
The Federal Reserve is now expected to end the special restrictions implemented during the pandemic on the ability of most major banks to repurchase shares and pay dividends from June 30, depending on the results of the annual stress tests. Banks will have to clear the minimum capital levels set by that review. Normally, under the Fed’s stress test regime, banks that do not meet their requirements have the ability to adjust their balance sheets and face restrictions that vary according to how much they are below their lows. For now, however, a bank that does not meet the minimum stress test remains subject to current restrictions, which limit repurchases based on residual net income, for an additional quarter before the usual regime takes effect.
That decision comes after the Fed did something that, in theory, could prevent payments to banks, which was to let the exemption expire for the Treasury and central bank reserves on measures of how leveraged the big banks are. This means that the big banks are now close to their leverage limits. Most crucially, however, the Fed’s stress capital buffer regime does not include a stressed leverage component. Therefore, this potential limitation may not affect payment restrictions for the time being.
Assuming this year’s stress test is not dramatically more rigorous than that of recent years, a significant portion of the money must be unlocked. Analysts at the Goldman Sachs Group estimate that the largest banks have the capacity under current rules, prior to the June 30 relaxation, to repurchase up to about $ 22 billion in shares in the second quarter. Once the rules are relaxed, they estimate that repurchases could almost triple in the second half of the year, to $ 63 billion, or about 3% of the market value of these banks. Consumer creditors who have recovered strongly so far may have one of the biggest potentials: Goldman analysts expect the biggest buyback in the second half of 2021 as a percentage of the market value among Capital One Financial’s major banks.
The extent to which banks take advantage of this capacity is the next question. In theory, under the stress capital buffer regime that started last year but was not actually used due to the pandemic, repurchases could take place at a faster rate than in the past. However, if loans recover strongly, risk-weighted assets will grow much faster than they did, with banks mainly buying government bonds, which could put pressure on capital ratios. The rapid increase in the price / book value ratio for bank shares can also discourage repurchases.