By Liz Moyer
Investing.com -- Banks are in a strong position despite the strain of pandemic-related economic lockdowns, but the Federal Reserve wants the industry to proceed with caution.
Share repurchases have been suspended for the third quarter and bank dividend payments will be capped at their current levels, with payouts based on a bank's recent earnings. Banks have to reassess their capital plans and may face another stress test later this year, the Fed said in announcing the results of its annual stress tests.
"There is material uncertainty about the trajectory for the economic recovery,” Fed Vice Chair Randall Quarles said in a statement. “As a result, the Board is taking action to assess banks’ conditions more intensively and to require the largest banks to adopt prudent measures to preserve capital in the coming months
Bank stocks surged ahead of Thursday's release of the tests, which were designed to see how well the financial system can weather an economic storm.
Bank of America Corp (NYSE:BAC) shares rose 3.8%,JPMorgan Chase & Co (NYSE:JPM) was up 3.5%, Citigroup Inc (NYSE:C) rose 3.7%, and Wells Fargo & Company (NYSE:WFC) rose 4.8%.
The banks were also trading higher after regulators indicated they would loosen financial crisis-era rules on trading activities, including relaxing margin requirements for certain types of trades, freeing up capital. The so-called Volcker Rule was put in place a decade ago to limit banks from using their capital to make risky trades and other types of investments, such as taking stakes in private equity and hedge funds. The idea was to prevent another large-scale taxpayer bailout. But bank regulators said Thursday they would soften those rules, according to Bloomberg.
The Federal Reserve's annual stress test of big banks, which started in 2009, is supposed to show what happens to their balance sheets – in terms of losses and capital levels – under an extreme hypothetical scenario.
The results give regulators a sense of whether a bank's plan to pay dividends and buy back shares will still leave enough of a buffer behind for it to endure a crisis.
This year's test includes a sensitivity analysis of coronavirus. Fed officials have said banks entered into the Covid-19 crisis in a strong position, but the duration of the pandemic and the associated lockdowns are uncertain, and that could mean pressure as credit losses accumulate. The Fed said Thursday some firms would approach their minimum capital levels.
Once the stress test results come out, banks can start to announce their plans for dividends and buybacks for the coming year, though that may also be delayed because of the uncertainty created by the pandemic. Some banks have already halted buybacks.