The Fed just said banks could buy back shares. JPMorgan and Goldman Sachs are soaring.

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The latest results of the Federal Reserve’s stress test are out, and if the stock market is any indication, it looks like many major banks have passed.

Starting next month, the central bank will allow banks to buy back a certain number of shares based on their income from the previous year. That’s a change compared to this year: in March, eight major banks stopped their share buyback programs due to the corona virus. In June, the Fed demanded that banks stop buybacks and put a limit on their dividend payments based on recent earnings.

A few major banks have already responded to the Fed’s decision by announcing buybacks starting in the first quarter of 2021. In a statement following the Fed’s announcement,

JPMorgan

Chase said the board has approved a new $ 30 billion share buyback program.

Goldman Sachs

said it plans to resume its share buyback program next quarter.

The Fed’s move was welcome, but somewhat surprising. While the Fed regularly praised the strength of the financial sector, it was expected that the buyback should only resume once the economy was firmer on track. Increasing coronavirus cases and the economic constraints they created led many to believe that buybacks would be allowed in the second half of next year.

This was the second round of stress tests the major banks had to undergo. Banks generally performed well in June, but given the unprecedented nature of the pandemic, the Fed wanted to test them again. This most recent round of testing assumed high unemployment and an economy that needed several quarters to recover. Even when the test scenarios were announced, the Fed admitted that the scenarios were “significantly more severe than most current baseline projections for the path of the US economy.”

Bank shares won after the announcement during out of hours trading. At around 6pm New York time, the

Financial Select Sector SPDR fund

(XLF) was up 3.3%, JPMorgan shares were up 5%, Goldman Sachs shares were up 5.1%, and

bank of America

was up 4.7%.

Write to Alexandra Scaggs at [email protected]