Stock dividends

The biggest U.S. banks, led by JPMorgan Chase and Bank of America, are expected to pay out $142 billion in capital to shareholders after clearing this year’s stress tests.

For banks that pass this year’s stress tests, the Federal Reserve said it will eliminate the restrictions on dividends and share buybacks while subjecting those institutions instead to the stress capital buffer.

Federal Reserve Chair Jerome Powell said the central bank will consider the pace of coronavirus vaccinations and other factors to determine if restrictions on dividends and share repurchases will continue.

The Federal Reserve's “midcycle” assessment — conducted in light of the COVID-19 pandemic — said the path of the economic recovery is still uncertain even though the banks that were evaluated maintained adequate capital levels under hypothetical scenarios.

As with most things related to 2020, COVID-19 will be a deciding factor as the Federal Reserve considers whether banks are able to increase their dividends or resume share buybacks.

The central bank issued a proposal aligning recent stress testing changes with supervisory standards that are tailored to an institution's size and complexity.

The Federal Reserve will continue its ban on share repurchases for banks with more than $100 billion of assets into the fourth quarter and will cap dividend payments using a formula based on recent income.

The agency has scheduled an extra assessment of institutions' strength to incorporate more recent economic data during the pandemic.

The agencies completed steps to ease a community bank capital measure temporarily and to delay a new credit-loss accounting standard.

With big banks largely shunning the program, small banks see an opening to grab more market share in commercial lending.

The Fed’s recent action capping dividend payments might prove inadequate once the coronavirus crisis really hits banks’ capital.

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While elevated loan-loss provisions are expected to eat into all banks’ earnings, midsize banks could suffer more than their big-bank rivals because they have fewer revenue drivers. Meanwhile, investors will be watching closely for any signs of dividend cuts stemming from the Federal Reserve’s caps on payouts.

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The Fed stopped short of banning payouts entirely following bank stress tests; banks get greater freedom to invest in venture capital funds and reduced collateral on swap trades.

The senior official said the Federal Reserve’s gauge of a firm’s performance under economic recovery scenarios will affect decisions about its capital distribution, but individual results of the analysis will not be made public.

Unlike in previous years, the results from two different evaluations will be released simultaneously and will include an assessment of bank capital under coronavirus-related scenarios.

The general structure of this year’s reviews is unchanged despite the pandemic. But a supplemental analysis of banks' response to the downturn could weigh heavily in evaluating 2020 capital distributions and making adjustments to the tests over the long run.

Payouts continue to be relatively generous, but that could change if the Federal Reserve demands banks bolster capital or the economy worsens.