Banks will be able to accelerate dividends and redemptions to shareholders this year, but not until June 30 and provided they pass the current round of stress tests, the Federal Reserve announced on Thursday.
The largest institutions on Wall Street have been limited based on revenue in their ability to do both for almost the last year, as a precaution during the Covid-19 pandemic.
The Fed said late last year that it will begin allowing regular payments in the first quarter of 2021, so Thursday’s announcement pushes this date back.
“The banking system continues to be a source of strength and a return to our normal framework after this year’s stress test will maintain that strength,” Vice President for Supervision Randal Quarles said in a statement.
Bank shares rose in trading after hours on the news, with Wells Fargo and JP Morgan Chase up about 1%.
The lifting of restrictions applies only to institutions that maintain adequate levels of capital, as assessed by stress tests. Under normal circumstances, capital distributions are guided by a bank’s “stress capital depreciation”, a measure of capital that each bank should carry based on the risk of its holdings.
Income-based measures have been implemented as a safeguard to ensure that banks have enough capital as the pandemic has disrupted the US economy.
Any bank that does not reach the target will have the restrictions of the pandemic era imposed until September 30. Banks that are still unable to meet the required capital levels will face even stricter limitations.
The financial sector is one of the leaders of the stock market this year, the group growing by 14.7% so far at the S&P 500. People United, Fifth Third and Wells Fargo led the banking space.
The announcement comes a day after Treasury Secretary Janet Yellen, who has chaired the Fed since 2014-18, said she would be comfortable lifting restrictions on dividends and redemptions.
At a congressional hearing on Wednesday, Yellen said he agreed with both the decision to suspend and resume capital payments.
“I objected earlier, when we were very concerned about the situation that banks would face on share buybacks,” Yellen said. “But financial institutions now look healthier and I think they should have some of the freedom provided by the rules to get returns to shareholders.”
Banks repurchased only $ 80.7 billion of their shares in 2020, most of them before the pandemic hit.