Temporary and additional restrictions on bank holding company dividends and share repurchases now in place will end for most firms after June 30, after completion of the current round of stress tests, the Federal Reserve announced Thursday.
According to a release, the Fed said that firms with capital levels above those required by the stress test will no longer be subject to the additional restrictions as of the end of June. Firms with capital levels below those required by the stress test will remain subject to the restrictions.
“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 K. Quarles said in the release.
The Fed said that after two rounds of stress tests last year, it found that large banks had strong capital levels, which provide a cushion against losses. “However, due to economic uncertainty from the COVID event, the Board put temporary and additional restrictions on capital distributions. Those restrictions limit bank dividends and share repurchases to an amount based on income over the past year,” the Fed said.
Under normal conditions, according to the Fed, a large bank’s capital distributions are restricted principally by the stress capital buffer (SCB) framework. The agency said the SCB sets a capital target for each bank based on its individual stress test results, which requires the bank to hold at least enough capital to survive a severe recession. If a firm does not meet that target, automatic restrictions are imposed, the agency noted.
If a bank remains above all of its minimum risk-based capital requirements in this year’s stress test, the additional restrictions will end after June 30, and the bank will be subject to the SCB’s normal restrictions, the Fed said. However: a bank that falls below any of its minimum risk-based requirements in the stress test will remain subject to the additional restrictions for three extra months, through Sept. 30, under the Fed’s program. If the firm remains below the capital required by the stress test at that time, the framework of the regular SCB regime will impose even stricter distribution limitations.
“For a bank that is not subject to the stress test this year and on a two-year cycle, the additional restrictions will end after June 30 and its SCB requirements based on the June 2020 stress test will remain in place,” the agency said.
Results for this year’s test will be released by July 1, the Fed added.