The Federal Reserve plans to end restrictions on large bank capital distributions such as dividends and share repurchases after the second quarter ends on June 30, the agency recently announced.
The plan is to put many large banks through one more round of stress testing, and banks with capital levels above their regulatory requirements as determined by stress testing will no longer be bound by the restrictions.
In stress testing, the Fed puts bank's balance sheets through a series of hypothetical economic scenarios to ensure that they can sustain loan losses and other headwinds during an economic downturn, while still maintaining enough capital to continue to lend.
"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," Randal K. Quarles, vice chair for supervision, said in a statement.
Early on in the pandemic last year, several of the large banks voluntarily suspended share repurchases. Then the Fed capped dividends and suspended repurchases in the second half of the year in order to preserve capital.
The Fed also ran two rounds of stress testing in the second half of 2020. Both of the tests showed that the banking system was capitalized well enough to survive and continue to lend in some extraordinarily severe and unlikely downside scenarios.
At the end of 2020, the Fed eased some of its restrictions for the first quarter of 2021, allowing banks to distribute capital through dividends and share repurchases up to an amount that did not exceed their four-quarter trailing average net income. These restrictions will remain in place through the second quarter of this year.
Not all large banks are stress tested on an annual basis. For those that are not planning to undergo stress testing this year -- like many large regional banks -- the Fed said current restrictions will end June 30, and those banks' capital requirements will be based on 2020 stress testing results.
Flush with excess capital, almost all large banks are eager to see the Fed's restrictions removed, although it's hard to know whether or not they expected to have to wait until after the second quarter.