The Federal Reserve on Friday relaxed the ban on share buybacks for the largest banks, enacted earlier this year, to ensure the sector had enough capital to continue functioning during the coronavirus pandemic.
The decision follows a new round of Fed stress tests showing that all banks met capital requirements under two recession scenarios.
“The banking system has been a source of strength over the past year and today’s stress test results confirm that major banks can continue to lend to households and businesses even during a highly unfavorable future turn in the economy,” said Randal Quarles, vice chair for supervision . .
Banks have faced restrictions on dividends and share buybacks since June after the coronavirus pandemic sent the economy into recession.
The Fed said it would allow repurchases as long as the aggregate amount of repurchases and dividends does not exceed the average of net income for the four consecutive quarters.
“If the company does not earn income, it cannot pay or buy back a dividend,” the Fed said in a statement.
“With current capital requirements and distribution restrictions in place, banks have built up capital over the past year. The modified restriction will continue to preserve capital and ensure that large banks can still lend to households and businesses, ”said the Fed.
Taken together, the restrictions prevent a company from paying out more through buybacks and dividends it earns.
Fed officials said they did not know which of the 33 banks would be allowed to buy back shares until banks release their net income for the fourth quarter.
The Fed tested the companies under two different recessionary scenarios. A Fed official said the tests were tough and the results were strong.
Banks are one of the hardest hit sectors of the S&P 500 SPX,
The index and their stocks are expected to evolve with the fight against the pandemic and an economic recovery as vaccines are rolled out.
The Financial Select Sector SPDR Fund XLF,
after-hours trading rose Friday, after closing 0.9% on Friday. The Invesco KBW Bank ETF KBWB,
was up more than 1.3% in the post-market trade, after a decline of 1.1%.
Shortly after the Fed news, JPMorgan Chase & Co. JPM,
announced a $ 30 billion share buyback program and said it would begin the buyback in the first three months of next year. Shares of JPMorgan were up 5% in after-hours trading on Friday. Shares of the bank closed 0.5% lower during Friday’s regular session.
The Fed’s announcement comes after the Dow Jones Industrial Average DJIA,
and S&P 500 index SPX,
ended the last full week of trading lower in December as investors awaited the progress of a coronavirus relief from Washington.
Jeremy Kress, a former Fed employee and now assistant professor of business law at the University of Michigan, said he found the Fed’s decision “premature,” given what health professionals say about the expected spike in COVID-19 cases. .
“All we hear is that this pandemic is not over and people should take all precautions and the Fed is showing none of that caution,” Kerr said.
Kress said he had some doubts about the rigor of the models the Fed used in the stress tests.
“I am not convinced that if we have a double dip recession, all major banks will remain above their minimum capital requirements,” he said.