Risk & Compliance

Fed Clears Banks to Make Payouts Without Limits

The Fed's three stress tests over the past year "have confirmed that the banking system is strongly positioned to support the ongoing recovery."
Matthew HellerJune 25, 2021

The largest U.S. banks have passed the latest round of Federal Reserve stress tests, clearing the way for them to distribute capital to shareholders through buybacks and dividends without any restrictions.

According to the Fed, all 23 banks that were tested “remained well above their risk-based minimum capital requirements” and, as a result, the restrictions on capital distribution “put in place during the COVID event will end.”

“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions and all have confirmed that the banking system is strongly positioned to support the ongoing recovery,” Fed Vice Chair Randal Quarles said in a news release.

The Fed barred banks in June 2020 from repurchasing their own shares or increasing dividend payments to ensure they would preserve capital amid the economic disruption of the coronavirus pandemic.

After the second round of stress tests, the central bank said in December it would allow banks to distribute cash to shareholders as long as the total amounts were no greater than the average of a bank’s earnings over the past four quarters.

With the lifting of that restriction, banks will be able to boost their payouts after June 30. Capital returned to investors over the coming year could approach $200 billion, according to Barclays analysts.

“We expect to see a number of banks post common equity tier 1 ratios meaningfully above the regulatory minimums enabling them to announce sizable dividend increases, especially since dividend increases were not permitted in 2020,” Gerard Cassidy, analyst at RBC Capital Markets, wrote in a client note.

“Stock repurchase announcements should be equally robust,” he added.

Under the worst-case scenario presented in the latest stress test, banks faced a severe global recession with substantial stress in commercial real estate and corporate debt markets. Even though the downturn would cause the banks to lose a combined $474 billion, the test showed they would still have more than twice as much capital required under Fed rules.

The tests over the past year included an additional mid-cycle check due to the pandemic.