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UPDATE 1-Fed to lift restrictions on bank dividends, share buybacks for 'most firms' after June stress test

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WASHINGTON, March 25 (Reuters) - The U.S. Federal Reserve announced on Thursday it would likely remove income-based restrictions on bank dividends and share buybacks for “most firms” in June after its next round of stress tests.

The central bank said that all large firms that can show they can stay above regulatory minimum capital requirements after undergoing the next stress test will no longer face those restrictions, which were imposed at the onset of the pandemic to help banks build up reserve cushions. Companies that see their levels fall below minimums during the test will have to adhere to the restrictions through Sept. 30.

The central bank said large firms that stay above minimum capital requirements after undergoing the next stress test will no longer face payout restrictions, which were imposed at the onset of the pandemic to ensure banks built up reserve cushions. Firms that see their levels fall below minimums during the test will have to adhere to the restrictions through Sept. 30.

Previously, the Fed had stipulated that banks could pay out dividends or buy back stock only so long as those levels did not exceed what the banks made in net income the prior year.

“The banking system continues to be a source of strength and returning to our normal framework after this year’s stress test will preserve that strength,” said Randal Quarles, the Fed’s top regulatory official.

The announcement is likely to be met with relief by large banks on Wall Street, which had bristled under the restrictions imposed in June 2020 to further bolster capital cushions at banks facing huge economic uncertainty. It also serves as a vote of confidence for banks that they have been able to weather the worst of the pandemic and can return to business as normal.

On Wednesday, Treasury Secretary Janet Yellen, who previously chaired the Fed, said she believed banks look healthy enough to pay dividends or repurchase stock.

The Fed also announced that smaller firms, which only face a Fed stress test every two years, will automatically be freed of the payout restrictions on June 30. (Reporting by Pete Schroeder; editing by Jonathan Oatis and David Gregorio)

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