US banks add $2 billion in dividend payments after Fed stress test shows they can withstand a financial crisis

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Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, U.S., March 17, 2020. Lucas Jackson/Reuters
  • US banks are increasing their dividend payments and authorizing new stock buyback programs following a successful Fed stress test.
  • Up to $20 billion in stock buybacks and an additional $2 billion in quarterly dividend payments have been announced by a group of US banks.
  • The Federal Reserve lifted temporary restrictions on dividends and stock buybacks.
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US banks were mostly higher in Tuesday morning trades after a successful Fed stress test enabled the group to significantly raise their dividend payments and authorize new share buyback programs.

The stress tests, which were put into place following the 2008 financial crisis, help ensure that large banks can support the economy during economic downturns. The hypothetical scenarios includes a 4% decline in the economy and a 55% decline in equity prices, similar to the downturn seen in 2008.

Last week, the Fed lifted temporary restrictions on bank dividends and stock buyback programs that were put into place amid the COVID-19 pandemic.

After a successful round of stress tests, US banks announced the authorization of up to $30 billion in stock buyback programs, and an additional $2 billion in quarterly dividend payments, according to the Financial Times.

The biggest dividend increases came from Morgan Stanley and Wells Fargo, which both doubled their quarterly dividend payments per share to $0.70 and $0.20, respectively. Goldman Sachs, Bank of America, and JPMorgan increased their quarterly dividend payments per share by 60%, 16%, and 11%, respectively.

Citigroup was the only major US bank to not increase its dividend payments following the successful stress test.

Meanwhile, Morgan Stanley and Wells Fargo took advantage of the easing of Fed restrictions by increasing their authorized stock buyback programs.

Wells Fargo announced an $18 billion stock buyback program to be in effect over the next year, while Morgan Stanley increased its previously announced stock buyback program to $12 billion from $10 billion.

The results of the Fed stress tests and the banks decision to increase their dividends and stock buyback programs help illustrate the overall confidence in the future of the US economy, which many economists estimate will grow upwards of 7% in 2021.