Fed says banks will have to wait until June 30 to start issuing buybacks and bigger dividends

Banks will be able to accelerate dividends and buybacks to shareholders this year, but not until June 30 and provided they pass the current round of stress tests, the Federal Reserve announced Thursday.

The biggest Wall Street institutions have been limited based on income in their ability to do both for nearly the past year as a precautionary measure during the Covid-19 pandemic.

The Fed had said late last year that it would begin allowing regular disbursements in the first quarter of 2021, so the Thursday announcement pushes that date back.

“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,” Vice Chair for Supervision Randal Quarles said in a statement.

Bank stocks rose in after-hours trading on the news, with Wells Fargo and JPMorgan Chase up around 1%.

Lifting the restrictions only applies to institutions that maintain proper capital levels as evaluated through the stress tests. Under normal circumstances, capital distributions are guided by a bank’s “stress capital buffer,” a measure of capital that each bank should carry based on the riskiness of its holdings.

The income-based measures were put in place as a safeguard to make sure banks had enough capital as the pandemic tore through the U.S. economy.

Any bank not reaching the target will have the pandemic-era restrictions reimposed until Sept. 30. Banks that still can’t meet the required capital levels will face even stricter limitations.

The financial sector is one of the stock market’s leaders this year, with the group up 14.7% year to date on the S&P 500. People’s United, Fifth Third and Wells Fargo have led the banking space.

The announcement comes a day after Treasury Secretary Janet Yellen, who chaired the Fed from 2014-18, said she would be comfortable with lifting the restrictions on dividends and buybacks.

At a congressional hearing Wednesday, Yellen said she agreed both with the decision to suspend capital disbursements, and to resume them.

“I have been opposed earlier when we were very concerned about the situation the banks would face about stock buybacks,” Yellen said. “But financial institutions look healthier now, and I believe they should have some of the liberty provided by the rules to make returns to shareholders.”

Banks bought back just $80.7 billion of their shares in 2020, with most coming before the pandemic hit.