The U.S. Federal Reserve has eased restrictions on capital distributions by banks after the latest round of stress tests on large banks showed strong capital levels.

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

But citing the results of this year’s second round of stress tests, the central bank said Friday it would allow banks to distribute cash to shareholders through buybacks as well as dividends as long as the total amounts are no greater than the average of a bank’s earnings over the past four quarters.

Within minutes of the announcement, JPMorgan Chase said it would buy back $30 billion of its shares during the first three months of 2021.

“With the current capital requirements and distribution restrictions in place, banks have built capital over the past year. The modified restriction will continue to preserve capital and ensure that large banks can still lend to households and businesses,” the Fed said in a news release.

The second round of tests focused on the banks’ ability to withstand severe downturns stemming from the pandemic. While the Fed found banks suffered more severe losses than under the previous tests, they remained above minimum capital requirements after taking those losses, reflecting months of building up reserves.

The results “confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy,” Vice Chairman Randal Quarles said.

The Fed governors voted 4-1 in favor of easing the capital distribution restrictions, with Lael Brainard dissenting.

“Today’s action nearly doubles the amount of capital permitted to be paid out relative to last quarter,” she said. “Prudence would call for more modest payouts to preserve lending to households and borrowers during an exceptionally challenging winter.”

Sen. Sherrod Brown, Ohio Democrat, was also critical, saying, “This public health and economic crisis is getting worse, not better. The Fed’s decision allows billions in dividends and bonuses for a select few while millions of Americans are reeling.”

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2 responses to “Fed Lifts Freeze on Bank Share Repurchases”

  1. While massive share buybacks tend to increase the price of equities, it doesn’t increase the value of the shares that are predicated on free cash flows, the growth of these free cash flows and risk. Buybacks are, in essence, a return of capital, reduce the level of shareholders’ equity and increase the risk to bondholders. However, they do increase GAAP EPS and this is all traders care about.

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