Last week, the Federal Reserve announced that restrictions imposed on major banks’ capital distributions to shareholders will be lifted after Jun 30, following the completion of this year’s stress test. The test helps evaluate safety and soundness of the banking sector.
The step is a vote of confidence for banks from the Fed, which had
restricted payouts last year
amid the coronavirus mayhem. This was done to preserve liquidity owing to the economic uncertainty.
The central bank had initially barred banks from repurchasing shares and capped dividends so that it doesn’t exceed bank’s recent profits. As such, few banks like
Capital One
COF
and
Wells Fargo
WFC
had to cut their quarterly dividends.
Nonetheless, following the second round of stress test in December 2020, the central bank allowed buybacks to resume from this year but still placed dividends under restrictions. Thus, several banks like
JPMorgan
JPM
,
Citigroup
C
,
Morgan Stanley
MS
and
Goldman Sachs
GS
resumed buybacks effective first-quarter 2021, though total distributions are still limited to bank’s trailing four-quarter average net income. Capital One even restored dividend to the pre-COVID-19 level.
Now once this year’s stress test results are out, banks with capital levels exceeding those required by the stress test will no longer be subject to additional restrictions. The banks with capital level lower than the requirement will remain subject to restrictions for another three months.
Vice Chair for Supervision Randal K. Quarles said, “The banking system continues to be a source of strength and returning to our normal framework after this year’s stress test will preserve that strength.”
Earlier in February, the Fed had come out with
hypothetical scenarios
– Baseline and Severely Adverse – with regard to 2021 stress test. It covers 13 quarters through the first quarter of 2024. The banks have to submit their capital plans by Apr 6.
This time 19 major banks, with more than $250 billion in assets, are part of the annual stress test. Of these, 10 with the large trading operations will be tested against a hypothetical global market shock, while 12 of these 19 companies that have significant trading or processing operations will be tested against the failure of their largest counterparty too.
Thus, once this year’s stress test results are out, banks, including
Bank of America
BAC
and U.S. Bancorp that have piled up huge levels of capital, are expected to come up with substantially large capital deployment plans.
5 Stocks Set to Double
Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.
Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.
Today, See These 5 Potential Home Runs >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
