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The Fed: Fed’s stress test shows big banks can withstand global recession, clearing way for payouts, share buybacks to resume

The Federal Reserve on Thursday announced that temporary limits on dividend payments and share buybacks on the nation’s largest banks can end after June 30, after the results of the latest stress test showed the firms have enough capital to withstand a severe global recession.

The so-called stress tests showed that 23 big banks, including Bank of America
BAC,
+1.57%
,
JP Morgan Chase
JPM,
+0.92%

and Citi
C,
+2.40%
,
could absorb a cumulative $474 billion of losses, with a global recession and the U.S. unemployment rate rising by 4 percentage points to a peak of 10.75%.

The Fed had put restrictions on bank payouts during the pandemic in an effort to conserve capital.

“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 Randal Quarles, Fed vice chairman for supervision, in a statement.

The firms’ aggregate common equity tier 1 capital ratio, which compares high-quality capital to risk-weighted assets, would fall from an actual level of 13% in the fourth quarter of 2020 to a minimum level of 10.6%. That was still more than double their minimum requirements, the Fed said.

The stress tests are designed to hit the banks with a hard shock to test what happens to their capital. This year all the banks individually stayed above their minimum capital levels.

Wall Street analysts expect the Fed’s decision to result in much higher dividend and share repurchases.

Critics say support from both the Fed and Congress for the economy also helped the health of the banks. Senior Fed officials said the government support allowed banks to accumulate capital in 2020. The stress tests last year showed that without that support, banks would have run their capital down, but not to levels that would have resulted in financial instability.

The Fed said it expected banks to wait until 4:30 p.m. on Monday, June 28, to announce their planned capital actions.

The Fed in March said it was prepared to end the temporary limits on dividend payments and share buybacks, subject to completion of the annual stress test.

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