Monday, September 27News That Matters

The Fed says buyback and dividend restrictions will end for most banks.

The Federal Reserve said Thursday that the pandemic-era limitations it had placed on banks that restricted share buybacks and dividend payouts will end midway through 2021 for most firms, a victory for some of America’s biggest financial institutions.

“Temporary and additional restrictions on bank holding company dividends and share repurchases currently in place will end for most firms after June 30, after completion of the current round of stress tests,” the Fed said in a release, a reference to its annual review that gauges a bank’s ability to withstand severe economic conditions.

Whether banks are able to restart normal payouts, which help to boost their share prices and reward investors, will hinge on whether they have capital above their required minimum levels. Since December, the amount that the banks can pay out to shareholders has been limited based on the company’s income over the past year. Before December, they had been barred from buying back shares or increasing dividends.

The Fed’s goal was to conserve capital — sources of funding that are easy to turn into cash in a pinch — so that banks would stay healthy and remain able to lend even as the United States economy took a major hit from the coronavirus pandemic and the lockdowns meant to contain it. Banks have remained healthy through the episode, helped in part by Fed policy responses that kept markets from melting down more disastrously last March.

“The banking system continues to be a source of strength, and returning to our normal framework after this year’s stress test will preserve that strength,” Randal K. Quarles, the Fed’s vice chair for supervision, said in a statement.

Still, restrictions could remain for some. Any “bank that falls below any of its minimum risk-based requirements in the stress test will remain subject to the additional restrictions for three extra months, through Sept. 30,” according to the Fed’s release.

And if they are still below after that, the central bank’s normal minimum capital requirement framework “will impose even stricter distribution limitations.”