Fed will lift limits on capital distributions for some banks — but not until 3Q

WASHINGTON— The Federal Reserve is leaving in place its current restrictions on bank dividend payments and share repurchases for the second quarter of this year, but will lift those caps at the end of June for banks that exceed the minimum required amount of capital, the central bank said Thursday.

Between June and December of last year, banks could not repurchase shares and had to limit dividends to what they paid out in the second quarter of 2020 in an effort to conserve capital as financial institutions dealt with the fallout from the coronavirus pandemic.

Those restrictions were eased starting in January, following midcycle stress tests, with dividends and buybacks capped at an amount based on 2020 income.

For banks that pass this year’s upcoming stress tests — the results of which will be announced by July 1 — the Fed said it will lift the restrictions on shareholder payouts and subject those institutions instead to the stress capital buffer, a unique benchmark of how much capital a bank has to hold in the coming year based on its performance in the stress tests.

If a bank does not meet the stress capital buffer target, it faces automatic limits on the amount of money it can pay out to shareholders.

“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,” Fed Vice Chair for Supervision Randal Quarles said in a news release.

Banks that fail the 2021 stress tests will have to comply with the current restrictions on dividend payments and share repurchases for an additional three months until Sept. 30, according to the release.

Meanwhile, the restrictions for banks on a two-year stress testing cycle and not subject to this year’s tests will lift after June 30, and those banks from that point forward will use their stress capital buffer that is calculated based on last year’s test to determine what level of capital distributions they can make.

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