Banks Can Resume Buybacks and Pay Dividends if They’re Profitable, Fed Says

The Federal Reserve on Friday said that the financial system’s biggest banks had the wherewithal to withstand a severe economic shock from the pandemic, and that they would be able to return more money to shareholders early next year as long as they show that they are profitable.

In June, the Fed put temporary caps on shareholder payouts by the nation’s biggest banks, including JPMorgan Chase, Bank of America and Wells Fargo, barring them from buying back their own stocks or increasing dividend payments. Regulators were trying to ensure that banks remained strong enough to keep lending as the economic fallout from the pandemic deepened.

Now, the Fed is telling banks that they can distribute cash to shareholders through buybacks as well as dividends, as long as those total amounts are no greater than the average of a bank’s earnings over the past four quarters.

The Fed usually conducts “stress tests” on the 33 large bank holding companies that it oversees once a year, a practice put in place by the Dodd-Frank financial reform law established after the 2008 financial crisis. Those tests were conducted in June, when payouts were curbed. However, this year, because of the pandemic, the Fed also did a special round of analysis this month.

This second round of tests focused specifically on the banks’ ability to withstand severe downturns stemming from the pandemic, which has had devastating economic consequences around the globe. Economists analyzed two different pandemic scenarios — a long and lasting recession, and a severe and short one. Both were more dire than the scenarios to which the Fed subjected the banks during the earlier, routine round of tests this year.

“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 Randall K. Quarles, the Fed’s vice chair of supervision, its top official in charge of bank regulation, in a statement accompanying the results on Friday.

The results come at a time when vaccines have created hope for a strong economic rebound in 2021, but the near-term outlook is bleak. Coronavirus cases are surging, unemployment insurance claims remain historically high, and retail spending is sagging. Small businesses, homeowners and other borrowers might struggle through the coming months, with possible implications for the banks that lend to them.

In the first scenario applied to the banks in the most recent tests, unemployment quickly hit 12.5 percent before falling back to 7.5 percent, while G.D.P. fell by 3.25 percent. In the second, unemployment did not go as high, topping out at 11 percent, but it stayed significantly above the desired rate for longer.

The Fed’s stress test results in June had included a new set of scenario analyses that checked in on how banks might hold up in a variety of possible paths that the pandemic took. In that earlier version, the Fed did not disclose how individual banks had fared in each scenario.

On Friday, it provided the details of how each bank performed under its two severe stress scenarios, though without commenting on individual banks’ performances. The Fed did say that none of the banks’ capital fell below the minimum required amount overall.

Throughout 2020, banks have pushed the Fed to allow them to continue paying dividends, worried that restricting the regular payouts would hit their stock prices. But watchdog groups have been critical of the Fed’s leniency, pointing out that in the 2008 financial crisis, officials allowed banks to keep making payouts to shareholders, which worsened the financial situation for banks that ultimately failed.

The central bank did curb buybacks, which make up a greater share of overall capital distributions for the largest banks. That means cash distributions for shareholders in companies like JPMorgan, Citigroup and Bank of America could come roaring back. Even Wells Fargo, which reported a loss during the second quarter this year, could start to hand out more cash, because the average of its four most recent quarters still indicates profitability.

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