Banks will be able to accelerate dividends and shareholder rewards this year, but not until June 30 and as long as they pass the current round of stress testing, the Federal Reserve announced on Thursday.
Wall Street’s larger institutions have been limited in terms of revenue in their ability to do both for nearly a year as a precautionary measure during the Covid-19 pandemic.
The Fed had said late last year that it would begin allowing regular disbursements in the first quarter of 2021, so Thursday’s announcement pulls that date back.
“The banking system remains a source of strength and a return to our normal framework after this year’s stress test will preserve that strength,” Supervising Vice President Randal Quarles said in a statement.
Bank shares rose in the after-hours news price, with Wells Fargo and JP Morgan Chase around 1%.
The removal of restrictions only applies to institutions that maintain the appropriate capital levels assessed through stress testing. Under normal circumstances, capital distributions are guided by a bank’s “capital buffer,” a measure of capital that each bank should carry based on the risk of its holdings.
Revenue-based measures were put in place as protection to make sure banks had enough capital as the pandemic broke the U.S. economy.
Any bank that fails to reach the target will receive pandemic-era restrictions until September 30th. Banks that are not yet able to reach the required capital levels will face even stricter constraints.
The financial sector is one of the leaders in the stock market this year, with a group that has risen 14.7% the previous year to date in the S&P 500. People’s United, Fifth Third and Wells Fargo have led the banking space.
The announcement comes a day after Treasury Secretary Janet Yellen, who chaired the 2014 Fed at 18-18, said she would be comfortable lifting the dividend and reward restrictions.
At a congressional hearing Wednesday, Yellen said he agreed with both the decision to suspend and disburse capital disbursements.
“I objected earlier when we were very concerned about the situation that banks would have to face on stock rewards,” Yellen said. “But financial institutions look healthier now, and I think they should have a share of the freedom that the rules offer to make shareholders profitable.”
Banks bought only $ 80.7 billion of their shares in 2020, most arriving before the success of the pandemic.