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The Federal Reserve on Friday loosened its ban on share buybacks for the largest banks that were put in place earlier this year to ensure the sector had enough capital to continue to function during the coronavirus pandemic.
The decision follows another round of Fed stress tests that show all banks met capital requirements under two recessionary scenarios.
“The banking system has been a source of strength during the past year and today’s stress test results confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy,” said Vice Chair for Supervision Randal Quarles.
Banks have faced restrictions on dividends and stock buybacks since June after the coronavirus pandemic threw the economy into a recession.
The Fed said it would allow buybacks as long as the aggregate amount of the repurchases and dividends don’t exceed the average of net income for the four proceeding quarters.
“If the firm does not earn income, it will not be able to pay a dividend or make repurchases,” the Fed said in a statement.
“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.
Taken together, the restrictions prevent a firm from paying out more via buybacks and dividends that it earns.
Fed officials said they didn’t know which of the 33 banks would be allowed to buyback shares until banks disclose their net income for the fourth quarter.
The Fed tested the firms under two different recessionary scenarios. A Fed official said the tests were tough and the results were strong.
Banks have been one of the hardest hit sectors of the S&P 500 SPX, -0.35% index and their shares are expected to move in tandem with the battle against the pandemic and an economic recovery as vaccines are rolled out.
The Financial Select Sector SPDR Fund XLF, -0.87% in after-hours trade Friday was rising, after closing 0.9% on Friday. The Invesco KBW Bank ETF KBWB, -1.08% was up more than 1.3% in post-market trade, following a 1.1% decline.
Soon after the Fed news, JPMorgan Chase & Co. JPM, -0.49% announced a $30 billion share repurchase program, saying that it would start the repurchase in the first three months of next year. Shares of JPMorgan were surging 5% in Friday after-hours trade. The bank’s shares closed 0.5% lower in the regular session Friday.
The Fed announcement comes after the Dow Jones Industrial Average DJIA, -0.41% and S&P 500 index SPX, -0.35% finished the last full week of trading in December lower, as investors awaited progress on a coronavirus relief aid out of Washington.
Jeremy Kress, a former Fed staffer and now an assistant professor of business law at the University of Michigan, said he thought the Fed’s decision was “premature” given what health professionals are saying about the projected spike in COVID-19 cases.
“Everything we hear is that this pandemic is not over and people need to take all precautionary measure and the Fed exhibits none of that caution,” Kerr said.
Kress said he had some doubt about the severity of the models the Fed used in its stress tests.
“I am not convinced that if we have a double-dip recession all the big banks will remain above their minimum capital requirements,” he said.
