Fed to lift dividend and share repurchase restrictions for US banks June 30


The Fed will allow major US banks, which have passed a round of stress tests to meet capital requirements, to resume their dividend increases as well as increase share buyback programs starting June 30.

Shares in US banks were boosted Thursday as the Federal Reserve System (FRS) announced the lifting of restrictions on dividend payments and share buybacks while meeting capital requirements.

To do this, banks undergo stress tests, which, according to the Fed, “assess the resilience of large banks by assessing their losses, income and capital levels under hypothetical scenarios for nine future quarters.”

This move by the US Central Bank suggests that the country’s financial sector is showing sufficient strength and gives confidence that the economy is recovering from the pandemic crisis. The decision was taken unanimously.

“The banking system continues to be a source of strength, and a return to our normal structure after a stress test this year will maintain that strength,” said Fed Deputy Chairman for Oversight Randal Quarles.

The Fed said the results of this year’s audit will be released on July 1. For those banks that fail stress tests, the restrictions will last until September 30.

Treasury Secretary Janet Yellen welcomed the Fed’s move, saying: “I was opposed when we were very concerned about the situation in which banks might face buybacks. But now financial institutions are looking healthier, and I think they should have some leeway, provided by the rules, in order to pay returns to shareholders. ”

Restrictions on share buybacks and the size of dividends were introduced by the Fed in the early months of the pandemic as measures that will allow banks to retain enough liquidity to cover potential loan defaults in a recession. The US banking sector has proven its resilience during the pandemic, although the profits of some banks have declined due to zero interest rates. The biggest gains in 2020 have come from large US banks with strong investment units that have benefited from volatility in financial markets.

Shares of the six largest US banks began to show strong gains since November 2020, and in December, following stress tests, the Fed lifted some restrictions on banks’ resumption of capital return programs in the first quarter of 2021, however, provided that dividends and share buybacks will be capped at an amount based on last year’s income.

Banks bought back their shares for just $ 80.7 billion in 2020, with most of it produced before the outbreak of the pandemic.

The chart below shows growth in JPMorgan Chase (JPM), Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS), Citigroup (C) and Wells Fargo (WFC).

The growth of bank shares against the background of news on Thursday (at the close of trading) and over the past 12 months amounted to:

  • for JPMorgan Chase: 1.28% and 66.3%, respectively;

  • Bank of America: 2.06% & 78.5%

  • Goldman Sachs: 0.58% vs. 113%;

  • Morgan Stanley: 1% & 135.75%

  • Citigroup: 2.34% & 71.3%

  • Wells Fargo: Growth of 3.1% on Thursday and 36.66% over the past 12 months, while growth over the past 6 months was 72%.

In additional positive news on Thursday, President Joe Biden announced that he would double his vaccination target to 200 million in his first 100 days in office, as the original target has already been met.

The Dow Jones Industrial Average rose 0.62%, the S&P 500 rose 0.52%, and the high-tech Nasdaq climbed 0.12%.

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