After more than a year of capital distribution restrictions during the pandemic, 2021's stress tests could mark a return to the routine.

Big banks have already cranked up stock repurchases after the Federal Reserve eased payout constraints in December 2020, and banks have said for months that they plan to further pare back capital in excess of regulatory minimums as the special limitations are fully phased out during the third quarter.

Analysts have projected that payout ratios, or money paid out in dividends and share buybacks as a percentage of net income, for many banks could surge well past 100% over the year starting in July, when banks will mostly be free to set shareholder distributions at will, as long as the distributions do not deplete capital to levels below regulatory minimums.

"We see little risk of any banks failing the test, and the group has extraordinarily robust capital levels," Piper Sandler analysts said in a note on June 17. They wrote that the "only real wildcards" are the speed and strength of a return to loan growth — which will help determine capital needs — and how quickly banks will seek to reduce capital levels, based in part on trading prices for their shares.

Signaling regulators' outlook on capital distributions going forward, Randal Quarles, a Trump appointee whose term as the Fed's top supervisory official ends in October, said in May that banks' success in weathering the pandemic under the current capital framework means that ad hoc restrictions will not be required in future crises.

This year's stress test results, to be published June 24, will give another read on estimated losses during a severe, hypothetical recession, which determine the size of each bank's new stress capital buffer, or SCB, a key component of each bank's required capital.

In addition to CET1 requirements, some banks have been pushed close to leverage minimums as massive deposit inflows have ballooned balance sheets. Banks nearer to the leverage minimums and those with high SCBs "will be most watched," Jefferies analyst Ken Usdin said in a note June 9.SCBs are calculated as the difference between each bank's starting Tier 1 common equity and their minimum over the stress tests' nine-quarter horizon, plus four quarters of common dividends. They can be set no lower than 2.5% of risk-weighted assets and are added to a universal 4.5% minimum and a variable buffer for the biggest, most complicated banks to arrive at total minimums for CET1 as a percentage of risk-weighted assets.

Estimated stress test losses, and the SCBs they determine, can vary substantially. Differences between CET1 minimums determined by the stress test results published in June 2020 and CET1 minimums estimated by S&P Global Market Intelligence based on a special round of stress test results published in December ranged from a roughly 1.5 percentage point decrease for Goldman Sachs Group Inc. to a 2.5 percentage point increase for M&T Bank Corp. (The December 2020 results were not used to reset SCBs.)

M&T was hit by projected losses in its commercial real estate book and the Fed's decision to toughen its scenarios for the sector to reflect risks that emerged during the pandemic. M&T is among a group of stress-test banks on the smaller side of the asset-size spectrum that are on a two-year cycle, meaning they do not have to participate this time and can keep their SCBs from 2020.

For the majority of publicly traded stress test banks, however, the estimated CET1 requirement differential between the two rounds of stress tests would have been less than 25 basis points. Usdin wrote that he expects SCBs "to be fairly consistent" year over year.

Comparing the relative severity of the economic scenarios used across different stress test rounds is difficult, in part because they use different starting points tied to actual conditions at the time, and the Fed follows guidelines that call for a sharper deterioration in variables when conditions are good and less deterioration when they are already bad.

Warning that the results can be unpredictable, Wolfe Research analyst Steven Chubak said in a June 9 analysis that the current scenarios are similar to the ones behind the results published in December 2020, which could be good for banks like Goldman Sachs since the interim tests implied a significantly lower capital requirement for the firm.

The current scenarios do incorporate even sharper pressure on CRE than the interim round. But despite Wells Fargo & Co.'s relatively high exposure to the sector, analysts have tabbed the bank as well-positioned for an end to pandemic-era payout restrictions. It was forced to cut its dividend in 2020 under a formula that restricted capital distributions based on recent earnings, and it appears to have accumulated a large stockpile of capital above regulatory requirements.

"It's possible our stress capital buffer goes up," Wells Fargo CFO Michael Santomassimo said at an investor conference June 15. "But in any event, it's clear we've got a lot of excess capital that we hope we can start, in a prudent way, giving back to shareholders, assuming the restrictions come off in the third quarter."

He added that the bank would seek to bring down its capital level over time but that the SCB framework gives it the flexibility to exceed a payout ratio of 100% when it sees fit.

Usdin projected that Wells Fargo's dividends and buybacks in 2022 will amount to nearly 14% of its current market cap. "Wells Fargo could be the winner of this" stress test cycle, Raymond James analysts said in a note June 15, noting that the bank's regulatory asset cap "has given the bank more excess capital than it otherwise would have."

Using March 31 numbers, some analysts computed that the supplementary leverage ratio — a measure of Tier 1 capital to on- and off-balance sheet exposures without risk-weightings — would be binding for JPMorgan Chase & Co. and Morgan Stanley now that a relaxation of the standard during the pandemic has expired. That would give both banks less clearance over regulatory minimums than implied by looking at CET1 ratios alone.

Still, Morgan Stanley would have an excess equivalent to about 8% of its market cap, according to Wolfe and Jefferies. Chairman and CEO James Gorman was bullish on capital distributions at an investor conference June 14.

"We have an embarrassment of riches," he said. "You've got to start eating into the buffer, or shareholders are just carrying excess capital for no good reason."

JPMorgan Chase, which had a relatively small 1.77 percentage point surplus over its required CET1 ratio at March 31, has said that it believes it can maintain a cushion above its supplementary leverage ratio minimum by continuing to issue preferred stock and guiding wholesale depositors toward other options for their excess cash, instead of retaining more common equity.