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Fed Will Let Big Banks Resume Share Buybacks

Major banks’ shares climb after Fed announcement and release of latest stress-test results.

The Federal Reserve said Friday it will allow major banks to resume share buybacks at the beginning of 2021, and JPMorgan Chase  (JPM) - Get JPMorgan Chase & Co. Report said just after the Fed announcement that its board voted for a new share buyback program worth $30 billion next year.

The Fed said dividends will continue to be capped and the buybacks will be subject to certain requirements. The total of a bank’s dividends and repurchases in the first quarter cannot be more than the average quarterly profit from the four most recent quarters.

Chase shares jumped more than 5% in late trade, following the announcements. Wells Fargo  (WFC) - Get Wells Fargo & Company Report was up 3.31% in late trade, and Bank of America  (BAC) - Get Bank of America Corp Report also gained after-hours, adding 4.71%. Goldman Sachs  (GS) - Get Goldman Sachs Group, Inc. Report rose 5% after hours.

Chase CEO Jamie Dimon said in a news release: “We will continue to maintain a fortress balance sheet that allows us to safely deploy capital by investing in and growing our businesses, supporting consumers and businesses, paying a sustainable dividend, and returning any remaining excess capital to shareholders.”

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In addition to the buyback announcement, the Federal Reserve said its most recent round of bank stress-tests results help ensure that large banks can support the economy during economic downturns. The tests evaluate the resilience of large banks by estimating their losses, revenue, and capital levels — which provide a cushion against losses—under hypothetical scenarios over nine future quarters.

"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," said Vice Chair for Supervision Randal K. Quarles.

According to the Fed statement, earlier this year, the Fed board conducted its annual stress test and additional analysis in light of the pandemic. "Those results found that banks generally had strong levels of capital, but considerable economic uncertainty remained. In response, the board put several restrictions in place to ensure that banks would preserve capital, including suspending share repurchases and limiting dividends. With the restrictions in place, large banks have recently built capital, despite setting aside about $100 billion in loan loss reserves."

JPMorgan Chase and Goldman Sachs are a part of Jim Cramer’s Action Alerts PLUS investing club.