Banks will be able to accelerate dividends and share buybacks this year, but not until June 30, and provided they pass the current round of stress tests, the Federal Reserve announced Thursday.
The largest Wall Street institutions have been limited in their ability to do both as a precautionary measure during the Covid-19 pandemic for almost the past year.
The Fed had said late last year that it would start allowing regular payouts in the first quarter of 2021, so Thursday’s announcement pushes that date back.
“The banking system remains a source of strength and the return to our normal framework after this year’s stress test will maintain that strength,” Randal Quarles, vice chair for supervision, said in a statement.
Bank stocks rose during after-hours trading on the news, with Wells Fargo and JP Morgan Chase up about 1%.
The lifting of the restrictions only applies to institutions that maintain appropriate levels of capital, as evaluated through the stress tests. Under normal circumstances, capital distributions are driven by a bank’s “stress capital buffer,” a measure of the capital each bank should hold based on the level of risk of its holdings.
The income-based measures were introduced as a precautionary measure to ensure that banks had enough capital when the pandemic ripped through the US economy.
For any bank that fails to meet its target, the pandemic-era restrictions will be re-imposed until September 30. Banks that still cannot meet the required capital levels face even tighter restrictions.
The financial sector is one of the leaders in the stock market this year, with the group so far up 14.7% versus the S&P 500. People’s United, Fifth Third and Wells Fargo have led the banking market.
The announcement comes a day after Treasury Secretary Janet Yellen, who chaired the Fed from 2014-18, said she would be comfortable lifting restrictions on dividends and buybacks.
During a congressional hearing on Wednesday, Yellen said she agreed with the decision to suspend capital spending and resume it.
“I have opposed me before when we were deeply concerned about the situation the banks would face when it comes to share buybacks,” said Yellen. “But financial institutions look healthier now, and I think they should have some of the freedom the rules provide to make a profit for shareholders.”
Banks bought back just $ 80.7 billion of their shares in 2020, most of them before the pandemic hit.