The lifting of restrictions

The Fed will allow large US banks that have passed a round of stress tests with capital requirements to resume dividend increases as well as increase share buyback programmes from 30 June.

US bank shares received a boost on Thursday as the Federal Reserve (Fed) announced it would lift restrictions on dividend payments and share buybacks if capital requirements are met.

The move by the US central bank indicates that the country's financial sector is showing sufficient strength and gives confidence that the economy is recovering from the pandemic crisis. The decision was taken unanimously.

The Fed said that the results of this year's examination will be published on 1 July. For those banks that fail the stress tests, the restrictions will last until 30 September.

Restrictions on share buybacks and dividend amounts were introduced by the Fed in the early months of the pandemic as measures to allow banks to retain enough liquidity to cover potential loan defaults in a recession. The US banking sector proved resilient during the pandemic, although some banks' profits declined due to zero interest rates. The biggest beneficiaries in 2020 were large US banks with strong investment divisions, which benefited from financial market volatility.

Shares of the six largest US banks started to show strong gains from November 2020 and in December, following stress tests, the Fed lifted some restrictions on banks resuming their capital return programmes in the first quarter of 2021, but on the condition that dividends and share buybacks are limited to an amount based on last year's earnings.

Banks bought back just $80.7bn worth of their shares in 2020, most of it before the pandemic began.

Banks' shares rose on the news on Thursday (at the close of trading) and over the past 12 months were up:

• For JPMorgan Chase: 1.28% and 66.3% respectively;
• Bank of America: 2.06% and 78.5%;
• Goldman Sachs: 0.58% and 113%;
• Morgan Stanley: 1% and 135.75%;
• Citigroup: 2.34% and 71.3%;
• Wells Fargo: up 3.1% on Thursday and 36.66% over the last 12 months, with a 72% increase over the last 6 months.