Fed says banks will have to wait until June 30 to start issuing bigger buybacks and dividends

Banks will be able to accelerate dividends and shareholder buybacks this year, but not before June 30 and provided they pass the current cycle of stress tests, the Federal Reserve said Thursday.

Larger Wall Street institutions have been constrained by their income in their ability to do both for nearly last year as a precautionary measure during the Covid-19 pandemic.

The Fed said late last year that it would start allowing regular disbursements in the first quarter of 2021, so Thursday’s announcement pushes that date back.

“The banking system continues to be a source of strength and the return to our normal framework after this year’s stress test will preserve that strength,” Vice President of Oversight Randal Quarles said in a statement.

Bank stocks rose after hours of trading on the news, with Wells Fargo and JP Morgan Chase up about 1%.

The lifting of restrictions only applies to institutions that maintain appropriate levels of capital, as assessed by stress tests. Under normal circumstances, distributions of capital are guided by a bank’s “stress capital cushion”, a measure of the capital that each bank should hold based on the risk level of its holdings.

The income-based measures were put in place to ensure banks had enough capital as the pandemic tore the U.S. economy apart.

Any bank that does not meet the target will see the pandemic era restrictions reimposed until September 30. Banks that still cannot meet the required capital levels will face even more stringent limitations.

The financial sector is one of the stock market leaders this year, with the group advancing 14.7% year-to-date on the S&P 500. People’s United, Fifth Third and Wells Fargo topped the list. banking area.

The announcement comes a day after Treasury Secretary Janet Yellen, who chaired the Fed from 2014 to 2018, said she would be comfortable with the lifting of restrictions on dividends and redemptions.

During a congressional hearing on Wednesday, Yellen said she agreed with both the decision to suspend and resume capital disbursements.

“I objected earlier when we were very concerned about the situation that banks would face with regard to share buybacks,” Yellen said. “But financial institutions seem healthier now, and I believe they should have some of the freedom offered by the rules to give returns to shareholders.”

Banks bought back just $ 80.7 billion of their shares in 2020, most of them before the outbreak of the pandemic.