The nation’s biggest banks can get back to business as usual.
The Federal Reserve said on Thursday that Wall Street lenders, soon to be freed from restrictions put in place to protect against losses from the pandemic, were most likely strong enough to fully resume shareholder payouts — the latest sign that the economy is returning to normal.
“The banking system is strongly positioned to support the ongoing recovery,” the Fed’s vice chair for supervision, Randal K. Quarles, said in a statement.
That means the nation’s biggest lenders — including JPMorgan Chase and Bank of America — can increase the amount of cash they pay out to shareholders through stock buybacks and dividends. Governmental efforts to prop up the economy, including enhanced unemployment benefits and stimulus payments, meant the kinds of loan losses that could have threatened the financial system never emerged.
In March, the Fed’s governors unanimously approved plans to end limits on buybacks and dividends after the second quarter as long as banks passed their so-called stress tests — the annual evaluations established by the Dodd-Frank financial reform law established after the 2008 financial crisis.
This year, the stress test assessed how the banks would fare under dire situations such as a severe global recession punctuated by major stress in commercial real estate and corporate debt markets alongside a 55 percent decline in equity prices. That hypothetical case would trigger collective losses of $470 billion among the 23 large banks, with nearly $160 billion of the losses from commercial real estate and corporate loans, the Fed said. While the banks’ capital ratios would fall to 10.6 percent under that scenario, that is still more than double the lowest required ratio.
The stringent conditions in the stress tests contrast with a more rosy reality: U.S. lenders have maintained a firm footing during the pandemic, racking up profits and building up reserves in preparation for a torrent of losses that so far hasn’t materialized. Bank stocks have jumped about 28 percent since January as a speedy vaccine rollout bolstered economic activity.
If a bank’s capital dips below certain levels in the tests, the Fed can restrict it from paying out money to shareholders. But a New York Times analysis of results suggests that none of the six largest banks are close to facing such restrictions.
“Everyone is expecting a considerable amount of dollars, in one form or another, to go back to shareholders after today,” Isaac Boltansky, the director of policy research at the research and trading firm Compass Point, said before the results were announced.
Lenders are expected to announce their capital plans on Monday afternoon, the Fed said. The lag will allow banks to compare their own analysis with the Fed’s and potentially revise their payout proposals.
Mayra Rodríguez Valladares, a financial risk consultant who trains bankers and regulators, said she expected banks to boost their dividend payouts and share buybacks — although she believed that would be premature.
“We still do not know how many corporate or individual defaults are coming our way once all stimulus and Fed programs to provide respite during Covid end,” Ms. Rodríguez Valladares said. “Banks should not be excessive in dividend payouts and should make sure that they are well above minimum capital levels to protect them if defaults rise later in the year.”
Industry executives have argued that they have enough capital and have advocated for bigger payouts.
“The fact that banks have such excess capital to reinvest in the form of buybacks and dividends is a promising sign for the economy,” Kevin Fromer, the chief executive of the Financial Services Forum, wrote in an opinion piece on Wednesday. Banks “have been through a real-life stress test during the past year and have shown that they are safe, strong, and are a key source of support for the economy,” wrote Mr. Fromer, whose group represents the eight largest U.S. banks.
The stress test results came at a time when bank oversight appears to be in for a shake-up. Mr. Quarles was appointed vice chair for supervision by President Donald J. Trump, and his term will expire in mid-October.
Mr. Quarles has spent his tenure making stress tests more streamlined and predictable. But the next time the banks go through their annual checkups, they most likely will be facing scenarios approved by different leadership.
Mr. Boltansky said the change will introduce an element of uncertainty for banks, who might encounter more strenuous scenarios related to climate or other financial risks, even as Thursday’s results were the regulatory equivalent of smooth sailing.
“Where I think it is a little bit hazier is what happens after this,” he said.