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The U.S. Federal Reserve further eased restrictions on dividends and repurchases from major U.S. banks, as it published an analysis showing that lenders could suffer losses of nearly $ 500 billion and yet comfortably meet capital requirements.
Twenty-three banks, including JPMorgan Chase and Goldman Sachs, were subjected to “stress tests” by the Fed that modeled the financial damage of a number of final judgment scenarios. These included a drop in the US stock market, a sharp drop in economic output and substantial distress in the commercial real estate sector.
The results, released on Thursday, will pave the way billions of dollars in stock repurchases and dividends, which investors in banks have been eagerly anticipating.
“Over the past year, the Federal Reserve has conducted 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, vice president of Fed oversight.
Annual stress tests showed that the country’s top lenders could withstand loan losses and other positions of $ 474 billion, and still emerged with more than double the required high-quality common-level capital or CET1, relative with its risk-weighted assets.
Of the US-based countries, investment banking groups Goldman Sachs and Morgan Stanley suffered the biggest hits from their capital ratios in stress tests, with declines of 5.9 and 4.7 percentage points respectively. , respectively.
This compares with an average decline of 2.4 percentage points of the 23 banks that underwent the tests, which included U.S. subsidiaries of foreign banks with significant operations in the United States.
Consumer debt accounted for a smaller share of overall losses than in previous years, as most retail customers spent last year paying off credit cards and other loans during the Covid-19 pandemic. But an increase in expected losses in commercial and industrial lending more than offset this decline. Nearly $ 160 billion in losses came from commercial and corporate real estate loans.
The Fed limit dividends and banned the repurchase of shares last year when the pandemic broke out. The central bank eased some of these restrictions in early 2021, but still limited the amount of money banks could return to shareholders to only the accumulated profits of the previous four quarters.
The Fed had already said it would go back These limits are pending the results of annual stress tests released Thursday, which are a requirement of the Dodd-Frank financial regulations introduced in the wake of the crisis.
Large banks have been bolstered by government stimulus and growing trading and bargaining revenues and their capital levels have also risen in part due to restrictions on shareholder payments.
The Fed expects banks to wait until Monday to analyze the results of stress tests before announcing any payment plans for new shareholders, according to senior Fed officials.
Barclays analysts estimate that the average bank in the 20 relevant institutions it covers will return more than 100% of its profits to shareholders over the next year, with a return on capital to investors approaching $ 200 billion.
From the tests, the Fed will also prescribe for each bank the amount of CET1 capital higher than the regulatory minimums it must maintain through a so-called stress capital buffer. The CET1 ratio measured with risk-weighted assets is a crucial benchmark for financial stability.
Banks typically aim to keep capital above regulatory minimums.
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