By Pete Schroeder and David Henry
WASHINGTON, June 24 (Reuters) - Large banks will no longer
face pandemic-era restrictions on how much they can spend buying
back stock and paying dividends, the Federal Reserve announced
Thursday after finding the firms would remain well capitalized
in its latest stress test.
The central bank said the test found 23 of the largest firms
would suffer a combined $474 billion in losses under a
hypothetical severe downturn, but that would still leave them
with more than twice as much capital required under Fed rules.
As a result, the Fed will lift limits on buybacks and dividends
it had put in place at the onset of the coronavirus pandemic.
The results will be met by a sigh of relief on Wall Street,
where firms had been limited on what they can pay out to
investors. Analysts expect banks like JPMorgan Chase,
Bank of America and Goldman Sachs will be able to
pay out more than $100 billion together over the next four
quarters.
The severity of losses under the test will be a factor in
setting new capital requirements for each firm and setting
boundaries for future dividends and share buybacks.
The Fed said it expects banks to wait until after markets
close at 4:30 p.m. EDT (2030 GMT) on Monday to announce
dividends and capital plans.
Banks suffered heavy losses in the test, which saw the
hypothetical jobless rate surge to 10.75%, the stock market lose
over half its value, and the economy contract by 4% driven by
particularly heavy losses in commercial real estate. But even
then, the Fed said overall bank capital ratios only fell as low
as 10.6%, more than twice the regulatory minimum.
Of the banks tested, HSBC's American operations saw
its capital levels fall to the lowest level, dropping to 7.3%,
while Deutsche Bank's U.S. operations saw the highest
capital level of 23.2%.
Thursday's results support Fed Vice Chair Randal Quarles's
stance that banks have performed well during the pandemic and as
the economy reopens will be able to operate from a position of
strength.
“Over the past year, the Federal Reserve has run three
stress tests with several different hypothetical recessions and
all have confirmed that the banking system is strongly
positioned to support the ongoing recovery,” said Quarles in a
statement on Thursday.
It also marks a return to normal for the Fed, after the
central bank had to upend its testing process in 2020 to account
for the coronavirus pandemic. The rapid onset of lockdowns in a
bid to contain the virus led to an economic downturn that
outpaced in many ways the Fed's prepared June test. Instead, the
Fed had to add more severe scenarios to its June exam and tested
banks a second time in December to ensure they were weathering
the pandemic.
The Fed imposed the extra payout restrictions one year ago
after finding banks overall suffered heavier losses under its
pandemic-informed analysis. The central bank then began to step
those back in December when banks posted stronger results,
allowing firms to begin buying back stock alongside paying
dividends, while still capping their size.
(Reporting by Pete Schroeder in Washington and David Henry in
New York; Editing by Lisa Shumaker)