Bank Buybacks Return, Hopefully Not With A Bang

The Federal Reserve gave the green light for U.S. lenders to resume big share repurchases on Thursday. All 23 of the large banks it subjected to its annual stress test passed muster. That means they can lavish their shareholders with buybacks and dividends if they choose; it doesn’t mean they should. During the past year of economic uncertainty, the Fed put banks in cuffs. It restricted dividend payouts and buybacks even though the industry passed two rounds of stress tests, including COVID-19-themed scenarios. Now the restraints are gone. That looks fair. The ratio of so-called common equity to risk-weighted assets for the group, among them JPMorgan (JPM), Goldman Sachs (GS), and Citigroup(C), declined to a still-comfortable 10.6% in a worst-case scenario where the unemployment rate hits almost 11%.

Banks now have the capacity to be generous to shareholders. The six largest – which also include Wells Fargo (WFC), Morgan Stanley (MS), and Bank of America (BAC) – may have excess capital of about $150 billion, according to their calculations and estimates by Autonomous research. Piper Sandler said firms could raise their dividend by 7.6% and repurchase 6.4% of their outstanding shares from the first quarter over the next year. Buying back shares tends to increase the earnings per share that big financial firms like to tout.

There are reasons to hold back, though. The unpredictability of COVID-19 is one: the more contagious Delta variant may be the dominant strain in the United States in a few weeks. There’s also uncertainty over the Fed itself. Randal Quarles’s term as vice chair of supervision at the central bank expires in October. He presided over some easing of regulations, like scrapping some less numerical factors like risk management in the stress test that had tripped up gaffe-prone banks like Citigroup. President Joe Biden will likely replace him with someone who would be tougher on Wall Street. That could be Fed Governor Lael Brainard, who has opposed moves to lighten the regulatory burden on banks.

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