Temporary and additional restrictions placed on banks that have limited their ability to offer dividends and share repurchases will end for most firms after June 30, the Federal Reserve Board announced last week.
The additional restrictions will be lifted after the completion of the current round of stress tests. Firms with capital levels above those required by the stress test will no longer be subject to additional restrictions. Firms with capital levels below those required by the stress test will remain subject to the restrictions.
Normally, a large bank’s capital distributions are restricted by the Fed’s stress capital buffer, or SCB, framework. 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. 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 it will be subject to the SCB’s normal restrictions.
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 September 30. 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.
The Fed has already done two rounds of stress tests and found that large banks had strong capital levels, which provide a cushion against losses. However, due to economic uncertainty from the COVID pandemic, 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 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,” The Fed’s Vice Chair for Supervision Randal Quarles said.
The results of this year’s stress tests will be released by July 1.