US bank stocks surge after Fed clears way for up to $11 billion of buybacks

US bank stocks surge after Fed clears way for up to $11 billion of buybacks
Brendan McDermid/Reuters
  • US bank stocks jumped on Monday after the Federal Reserve partially lifted its pause on share buybacks at the firms.
  • The central bank said Friday that banks can resume repurchases in the first quarter of 2021 so long as they don't exceed the average quarterly profits from their past four quarters.
  • That sets up the top six banks for roughly $11 billion in first-quarter buybacks.
  • Goldman Sachs led the rally with a 7.7% increase. Morgan Stanley and JPMorgan jumped 6.4% and 4.9% at intraday highs, respectively.
  • The Fed also found that all major banks passed a second round of stress tests, indicating the firms can continue lending to businesses and households even if the economy dipped into a new recession.
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US bank stocks rallied on Monday after the Federal Reserve announced it would allow firms to restart multibillion-dollar stock repurchase programs in 2021.

The central bank said Friday afternoon that banks can resume stock buybacks at limited capacities. The new rules stipulate the sum of a bank's dividend payments and buybacks in the first quarter can't exceed the average quarterly earnings from the four most recent quarters.

Still, the updated policy allows the country's top six banks to repurchase roughly $11 billion in shares over the next three months.

Goldman Sachs gained the most among its peers, climbing as much as 7.7% on the news. Morgan Stanley and JPMorgan jumped 6.4% and 4.9% at intraday highs, respectively. All three banks have announced plans to resume buybacks in the new year.

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The buyback halt staved off one of bank stocks' biggest boons through much of the pandemic. The Fed instituted the freeze to bolster firms' balance sheets and protect against unforeseen losses. The stricter buyback rules, coupled with increased loan-loss reserves, weighed on financial stocks earlier in 2020.

Banks outperformed a broad market slump fueled by the emergence of a new strain of the coronavirus in the UK. The move marked a reversal from recent sessions that saw financials lag the market.

The Fed also announced the financial industry held up well in a second round of stress tests. The central bank aimed to see how banks could perform across two hypothetical recessionary scenarios: one with a sharp rise in unemployment and a rapid rebound, and another with a smaller jump in unemployment and a slower recovery.

Banks' capital ratios remained well above the Fed's minimum passing levels in both scenarios, indicating firms are well prepared for a potential double-dip recession.

"The banking system has been a source of strength during the past year and 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," Randal Quarles, the central bank's vice chair for supervision, said in a press release.


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