US banks prepare for repurchase bonus after passing stress tests

The US Federal Reserve eased restrictions on dividends and repurchases by the largest US banks, releasing an analysis showing that lenders could incur nearly $500 billion in losses and still comfortably meet capital requirements.

Twenty-three banks, including JPMorgan Chase and Goldman Sachs, have been subjected to “stress tests” by the Federal Reserve that model the financial damage caused by a series of Doomsday scenarios. This included the collapse of the US stock market, a sharp decline in economic output, and a major shortage of commercial real estate.

The results, released on Thursday, will pave the way Billions of dollars in stock buybacks and dividendsWhich is what bank investors have been eagerly awaiting.

“Over the past year, the Fed has conducted three stress tests with many different hypothetical recessions, and all of them confirmed that the banking system is in a strong position to support an ongoing recovery,” said Randall Quarles, Federal Reserve Vice Chair of Supervision.

Annual stress tests showed that the nation’s largest lenders could incur $474 billion in losses from loans and other positions, and still come out with more than twice the required high-quality Tier 1 equity, or CET1, than their risk-weighted assets.

Among those headquartered in the United States, investment bank groups Goldman Sachs and Morgan Stanley suffered the biggest blows to capital ratios in stress tests, with declines of 5.9 and 4.7 percentage points, respectively.

That’s compared to an average drop of 2.4 percentage points for the 23 banks tested, which included US branches of foreign banks with large US operations.

Consumer debt has accounted for a smaller portion of overall losses than in previous years since most retail customers spent the past year paying off credit cards and other loans during the Covid-19 pandemic. But the increase in expected losses in commercial and industrial loans offset this decline. Nearly $160 billion in losses came from commercial real estate and corporate loans.

Fed Limited profits It banned share buybacks last year when the pandemic broke out. The central bank eased some of these restrictions at the beginning of 2021, but it still limits the amount of money banks can return to shareholders to no more than the cumulative profits of the previous four quarters.

The Federal Reserve had previously said it would swipe back More such restrictions await the results of annual stress tests published Thursday, which are a requirement of Dodd-Frank’s financial regulations introduced in the wake of the crisis.

Big banks were boosted by government stimulus and increased revenues from trade and deal-making, and their capital levels were inflated in part by restrictions on shareholder payments.

The Fed expects banks to wait until Monday to analyze stress test results before announcing any plans for new shareholder payments, according to senior Fed officials.

Barclays analysts estimate that the average bank among the 20 related institutions it covers will return more than 100 percent of its profits to shareholders over the next year, with capital returning to investors close to $200 billion.

From the tests, the Fed will also determine for each bank how much CET1 capital is in excess of the regulatory minimum it needs to hold a so-called temporary capital reserve. The CET1 ratio measured against risk-weighted assets is an important measure of financial stability.

Banks usually aim to hold capital in excess of the regulatory minimum.

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