On Friday, the Federal Reserve relaxed its ban on repurchasing shares for larger banks that were established earlier this year to ensure the sector had enough capital to continue operating during the coronavirus pandemic.
The decision follows another round of Fed stress tests showing that all banks met capital requirements in two recessionary scenarios.
“The banking system has been a source of strength over the last year and today’s stress test results confirm that large banks could continue to lend to homes and businesses even in the future strongly adverse future in the economy, ”said Randal Quarles, vice president of oversight. .
Banks have faced dividend restrictions and stock rewards since June after the coronavirus pandemic launched the economy into a recession.
The Fed said it would allow rewards as long as the aggregate amount of rewards and dividends does not exceed the average net income for the next four quarters.
“If the company doesn’t make revenue, it won’t be able to pay a dividend or buy back,” the Fed said in a statement.
“With current capital requirements and current distribution restrictions, banks have been building capital over the last year. The amended restriction will continue to preserve capital and ensure that large banks can still lend to households and businesses, ”the Fed said.
Taken together, restrictions prevent a company from paying more through rewards and dividends it earns.
Fed officials said they did not know which of the 33 banks would be allowed to repurchase shares until the banks disclosed their net income for the fourth quarter.
The Fed tested companies under two different recessionary scenarios. A Fed official said the tests were tough and the results strong.
Banks have been one of the most affected sectors of the S&P 500 SPX,
the index and its quotas are expected to move along with the battle against the pandemic and economic recovery as vaccines spread.
The SPDR XLF Sector Select Financial Fund,
on Friday in off-hours trading operations grew, after closing 0.9% on Friday. The Invesco KBW Bank KBWB ETF,
increased by more than 1.3% in trade after trading, after a decline of 1.1%.
Shortly after Fed news, JPMorgan Chase & Co. JPM,
announced a $ 30 billion share repurchase program, saying it would begin repurchasing in the first three months of next year. Shares of JPMorgan were up 5% on Friday after business hours. The bank’s shares closed 0.5% lower at Friday’s regular session.
The Fed announcement comes after the Dow Jones Industrial Average DJIA,
and S&P 500 SPX index,
ended the last full week of trading in December lower as investors hoped to advance in aid for coronavirus relief outside of Washington.
Jeremy Kress, a former Fed employee and now an assistant professor of business law at the University of Michigan, said he considered the Fed’s decision “premature,” given what health professionals say about the planned rise in the COVID-19 cases.
“All we feel is that this pandemic is not over and people need to take all precautionary measures and the Fed is not expressing any of that caution,” Kerr said.
Kress said he had some doubts about the severity of the models the Fed used in its stress tests.
“I’m not convinced that if we have a double-dip recession, all the big banks will stay above their minimum capital requirements,” he said.