The Federal Reserve announced on Friday that it would allow the country’s largest banks to resume share buybacks in the first quarter of 2021 under certain rules.
Dividends will continue to be capped, the Fed said, and a bank’s total of dividends and repurchases in the first quarter cannot exceed the average quarterly profit for the last four quarters.
Share buybacks are important to the industry and typically account for around 70% of the industry’s capital payments to shareholders.
JPMorgan Chase, the largest U.S. bank by assets, announced in the minutes following the Fed’s test results that its board had approved a new $ 30 billion share buyback program starting in 2021.
“We will continue to maintain a solid balance sheet that will enable us to deploy capital safely by investing in and growing our businesses, supporting consumers and businesses, paying sustainable dividends, and returning any remaining excess capital to shareholders,” said CEO Jamie Dimon in a publication.
Bank stocks rose across the board in over-the-counter trading, with JPMorgan up 5.3%, Goldman Sachs up 4.4% and Wells Fargo up 3.5%.
While the announcement wasn’t a complete lifting of the Fed’s restrictions, it did signal that officials are increasingly pleased with the amount of capital that the largest U.S. banks have been able to raise over the course of 2020.
Randal Quarles, the Fed’s vice chairman for oversight, was positive, saying the capital constraints put in place by the central bank are working.
“The banking system has been a source of strength over the past year and today’s stress test results confirm that large banks can continue to lend households and businesses even during a severely adverse future economic turnaround,” Quarles said in a press release.
According to the Fed report, the increased capital requirements will not be rolled back to ensure adequate safeguards against unexpected losses.
Randal Quarles, Vice Chairman of the Federal Reserve Regulator, at the NABE Economic Policy Conference on February 26, 2018 in Washington, DC, USA.
Joshua Roberts
Senior Fed officials said large banks managed to build key capital ratios and loss absorbing capacity despite putting aside about $ 100 billion in credit risk reserves.
The Fed has been developing hypothetical doomsday scenarios every year for more than a decade to test whether the country’s largest banks can withstand various simulations of recession.
However, banks faced their own real-world test in the first half of 2020, when a surge in US unemployment and widespread business closures wiped out a significant portion of US income. The spring recession forced banks to build credit risk reserves and prepare for widespread credit losses.
With the shutdown of normal business in much of the United States, JPMorgan Chase and Bank of America stocks fell 16.6% and 15.1%, respectively, between early March and late April. Wells Fargo equity lost 29% of its value over the same period.
Against this background, the Fed conducted its first stress tests of the year.
In June, officials announced that banks had done a solid job of building capital and credit loss protection, but that they were precautionary capping dividends and prohibiting share buybacks in the third quarter.
People who have lost their jobs wait in line to report unemployment after a coronavirus disease (COVID-19) outbreak at an Arkansas workforce center in Fort Smith, Arkansas, United States, on April 6, 2020.
Nick Oxford | File photo | REUTERS
The new assessments examined how banks would perform under three different scenarios: a relatively harmless “baseline” and two serious hypothetical futures, according to a report released by the Fed on Thursday.
The Fed said large banks would have more than $ 600 billion in aggregate losses in both adverse circumstances, well above the first stress test this year. Still, the Fed said that each bank’s risk-based capital ratio would stay above the minimum required in both scenarios.
The first severe scenario tested the resilience of banks when the US economy experienced a comparatively sharp decline in growth.
In this scenario, the US unemployment rate briefly hits a high of 12.5% in 2021, inflation falls and real GDP falls 3.25% from the third quarter of 2020. Share prices will drop more than 30% from the third to the fourth quarter of 2020.
The Fed’s second major scenario sought to mimic how the economy would perform if a series of second Covid-19 waves occurred in different regions of the US over time. In contrast to the first scenario, the second major outcome is characterized by a gentler initial decline in activity but a slower recovery.
The unemployment rate peaks at 11% in the fourth quarter of 2020 and will remain there through the fourth quarter of 2021. Real GDP will decline 9% on an annualized basis in the fourth quarter of 2020, and stocks will decline 50% by the end of 2021 compared to the end of March third quarter.
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