Banks erase Fed stress tests, paving the way for higher buybacks and dividends
WASHINGTON (Reuters) – Big banks will no longer face pandemic-era restrictions on how much they can spend to buy back stocks and pay dividends, the Federal Reserve said on Thursday after finding that companies would remain well capitalized in its latest stress test.
The central bank said the test found 23 of the largest companies would suffer combined losses of $ 474 billion in a hypothetical severe recession, but that would still leave them more than twice as much capital required under the rules of the Fed. As a result, the Fed will lift the limits on buybacks and dividends it put in place at the start of the coronavirus pandemic.
The results will be greeted with a sigh of relief on Wall Street, where companies had been limited on what they could pay investors. Analysts expect banks like JPMorgan Chase, Bank of America and Goldman Sachs to be able to pay more than $ 100 billion together over the next four quarters.
The severity of losses under the test will be a factor in setting new capital requirements for each company and setting limits for future dividends and share buybacks.
The Fed has said it expects banks to wait after markets close at 4:30 p.m. EDT (8:30 p.m. GMT) on Monday to announce dividends and capital plans.
Banks suffered heavy losses in the test, which saw the hypothetical unemployment rate climb to 10.75%, the stock market lose more than half of its value, and the economy contract by 4% due to losses. particularly burdensome in commercial real estate. But even then, the Fed said overall bank capital ratios only fell 10.6%, more than double the regulatory minimum.
Among the banks tested, HSBC’s US operations saw their capital levels drop to the lowest level, falling to 7.3%, while Deutsche Bank’s US operations saw the highest level of capital of 23.2%.
Thursday’s results support the position of Fed Vice Chairman Randal Quarles that banks have performed well during the pandemic and, when the economy reopens, they can operate from a position of strength.
“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions and all of them have confirmed that the banking system is strongly positioned to support the ongoing recovery,” Quarles said in a statement Thursday.
It also marks a return to normal for the Fed, after the central bank had to change its testing process in 2020 to take into account the coronavirus pandemic. The rapid onset of lockdowns in an attempt to contain the virus resulted in an economic slowdown that in many ways exceeded the test prepared by the Fed in June. Instead, the Fed had to add tougher scenarios to its June review and tested banks a second time in December to make sure they were resisting the pandemic.
The Fed imposed additional payment restrictions a year ago after finding that banks globally suffered heavier losses as part of its pandemic-based analysis. The central bank then began cutting them in December when banks posted stronger results, allowing companies to start buying back stocks while paying dividends, while limiting their size.
Reporting by Pete Schroeder in Washington and David Henry in New York; Editing by Lisa Shumaker