Fed allows banks to resume stock buybacks with limitations

Dive Brief:

The Federal Reserve said the country's largest banks can resume stock buybacks in the first quarter of 2021 with certain limitations, after the central bank released the results of its first-ever "mid-cycle" stress tests Friday.
"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," Fed Vice Chairman for Supervision Randal Quarles said in a press release.
Following the Fed's announcement Friday, banks including JPMorgan Chase, Goldman Sachs and Citi said they would resume their share repurchase programs.

Dive Insight:

None of the largest banks fell beneath their capital minimums under the Fed's hypothetical stress scenarios, which assessed how banks are navigating the coronavirus pandemic, the central bank said.

Due to the strong performance from banks in the second stress test of 2020, the Fed said it will permit banks to buy back a certain amount of shares based on their income from the prior year, as long as a bank can show it has been profitable and the total amounts are no greater than the average of the banks' earnings over the past four quarters.

The central bank enacted several restrictions in June, including ordering the nation's largest banks to suspend share buybacks and cap dividend payments.

Although buybacks can now resume, the Fed said it would continue to cap dividend payments through March. Dividend payments are capped at the level each bank returned in the second quarter of 2020.

JPMorgan Chase was the first bank to announce it would resume share repurchases. Just minutes after the Fed released stress test results, the bank announced its board approved a new share repurchase program of $30 billion.

"We will continue to maintain a fortress balance sheet that allows us to safely deploy capital by investing in and growing our businesses, supporting consumers and businesses, paying a sustainable dividend, and returning any remaining excess capital to shareholders," CEO Jamie Dimon said in a statement Friday.

Dimon has been vocal about his desire to repurchase the bank's stock amid a rally.

"I hope we can do it before it goes way up," he said in July, according to Bloomberg.

Morgan Stanley on Friday said its board of directors authorized the repurchase of $10 billion in 2021, and Goldman Sachs and Citi indicated Friday that they, too, plan to resume their share repurchase programs next year.

Wells Fargo said it would provide guidance on its capital distribution plans in January.

In a statement Friday, Wells Fargo CEO Charlie Scharf said returning capital to shareholders "remains a priority for Wells Fargo."

"While we expect to have modest capital distribution capacity in the first quarter, we continue to have significant excess capital above regulatory requirements," he said.

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

Brainard, who also took issue with the central bank's decision to cap and not halt dividend payments in June, said the decision nearly doubles the amount of capital permitted to be paid out relative to last quarter.

"For several large banks, projected losses take capital levels very close to the minimum requirement, in the range where banks tend to pull back from lending, even before payouts," Brainard said in a statement. "Prudence would call for more modest payouts to preserve lending to households and borrowers during an exceptionally challenging winter."

Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking Committee, also criticized the Fed's move Friday.

"This public health and economic crisis is getting worse, not better," Brown said in a statement. "The Fed's decision allows billions in dividends and bonuses for a select few while millions of Americans are reeling from this crisis. It is wrong. The Fed should be focused on making our financial system safer not helping Wall Street and big corporations."