The Federal Reserve on Friday loosened its ban on share buybacks for the largest banks that were put in place earlier this year to ensure the sector had enough capital to continue to function during the coronavirus pandemic.
The decision follows another round of Fed stress tests that show all banks met capital requirements under two recessionary scenarios.
“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,” said Vice Chair for Supervision Randal Quarles.
Banks have faced restrictions on dividends and stock buybacks since June.
The Fed said it would allow buybacks as long as the aggregate amount of the repurchases and dividends don’t exceed the average of net income for the four proceeding quarters.
“If the firm does not earn income, it will not be able to pay a dividend or make repurchases,” the Fed said in a statement.
“With the current capital requirements and distribution restrictions in place, banks have built capital over the past year. The modified restriction will continue to preserve capital and ensure that large banks can still lend to households and businesses,” the Fed said.
Taken together, the restrictions prevent a firm from paying out more via buybacks and dividends that it earns.
Fed officials said they didn’t know which of the 33 banks would be allowed to buyback shares until banks disclose their net income for the fourth quarter.
The Fed tested the firms under two different recessionary scenarios. A Fed official said the tests were tough and the results were strong.
Banks have been one of the hardest hit sectors of the S&P 500 and are expected to move in tandem with the battle against the viral outbreak and an hoped-for economic recovery.
The Financial Select Sector SPDR Fund
in after-hours trade Friday were rising, after closing 0.9% on Friday. The Invesco KBW Bank ETF
was up more than 1.3% in post-market trade, following a 1.1% decline.
Soon after the Fed news, JPMorgan Chase & Co.
announced a $30 billion share repurchase program, saying that it would start the repurchase in the first three months of next year. Shares of JPMorgan were surging 5% in Friday after-hours trade. The bank’s shares closed 0.5% lower in the regular session Friday.
The Fed announcement comes after the Dow Jones Industrial Average
and S&P 500 index
finished the last full week of trading in December lower, as investors awaited progress on a coronavirus relief aid out of Washington.