Bank rules relaxed after stress testing

The Federal Reserve on Friday said the financial system’s biggest banks had the wherewithal to withstand a severe economic shock from the pandemic, and that they would be able to return more money to shareholders early next year as long as they show they are profitable.

In June, the Fed put temporary caps on shareholder payouts by the nation’s biggest banks, including JPMorgan Chase, Bank of America and Wells Fargo, barring them from buying back their own stocks or increasing dividend payments. Regulators were trying to ensure that banks remained strong enough to keep lending as the economic fallout from the pandemic deepened.

Now the Fed is telling banks that they can distribute cash to shareholders through buybacks as well as dividends, as long as the total amounts are no greater than the average of a bank’s earnings over the past four quarters.

The Fed usually conducts stress tests on the 33 large bank holding companies that it oversees once a year, a practice put in place by the Dodd-Frank financial reform law established after the 2008 financial crisis. Those tests were conducted in June, when payouts were curbed. However, this year because of the pandemic, the Fed also did a special round of analysis this month.

This second round of tests focused specifically on the banks’ ability to withstand severe downturns stemming from the pandemic, which has had devastating economic consequences around the globe. Economists analyzed two scenarios — a long recession, and a severe but short one.

“Today’s stress test results confirm that large banks could continue to lend to households and businesses even during a sharply adverse future turn in the economy,” said Randall Quarles, the Fed’s vice chair of supervision, its top official in charge of bank regulation.