The US Federal Reserve further loosened restrictions on dividends and buybacks imposed on America’s biggest banks during the Covid-19 pandemic, as it released an analysis showing the lenders could suffer almost $500bn in losses and still comfortably meet capital requirements.

Twenty-three banks, including JPMorgan Chase and Goldman Sachs, underwent “stress tests” by the Fed that modelled the financial damage from a series of doomsday scenarios. These included a US stock market crash, a steep drop in economic output, and substantial distress in commercial real estate.

The results, released on Thursday, pave the way for billions of dollars in stock buybacks and dividends, which bank investors have been eagerly anticipating.

“Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions and all have confirmed that the banking system is strongly positioned to support the ongoing recovery,” Randal Quarles, the Fed’s vice-chair for supervision, said.

Big banks have been bolstered by government stimulus and buoyant revenues from trading and dealmaking and their capital levels have also swelled in part due to the restrictions on shareholder payouts.

The Fed expects banks to wait until Monday to analyse the results of the stress tests before announcing any plans for new shareholder payouts.

“The results came in as expected,” said Gerard Cassidy, an analyst at RBC Capital Markets. “All of the large banks aced the test which enables them now on Monday to announce their capital action plans.”

Bar chart of US lenders have capital well in excess of what their regulatory needs are likely to be showing Banks holding excess capital

From these plans, the Fed will prescribe for each bank how much high-quality common equity tier one, or CET1, capital relative to their risk-weighted assets in excess of regulatory minimums they need to keep. The CET1 ratio is a crucial benchmark of financial stability. RBC estimated all the banks will have capital well in excess of the regulatory requirements.

Bank stocks rose in after-market trading, with Wells Fargo and Citigroup among the biggest gainers, up 3.5 per cent and 2.8 per cent, respectively.

“In some instances, it will be more evident that some banks will have more excess capital than others and the market will make a knee-jerk reaction,” said David George, senior research analyst at Robert W Baird.

The annual stress tests showed the country’s largest lenders could withstand $474bn in losses from loans and other positions, and still emerge with more than double the required capital.

Of those headquartered in the US, investment banking groups Goldman Sachs and Morgan Stanley suffered the biggest hits to their CET1 ratio in the stress tests, with declines of 5.9 and 4.7 percentage points, respectively.

This compared to an average decline of 2.4 percentage points for the banks that underwent the tests, which included the American subsidiaries of foreign banks with significant US operations.

Consumer debt accounted for a smaller portion of overall losses than previous years since most retail customers spent the past year paying down credit cards and other loans during the Covid-19 pandemic. But an increase in expected losses in commercial and industrial loans more than offset that decline. Nearly $160bn of the losses came from commercial real estate and corporate loans.

The Fed capped dividends and banned stock buybacks last year at the outbreak of the pandemic. It had previously said it would pull back the remaining limits further pending the results of the annual stress tests published on Thursday, which are a requirement of the Dodd-Frank financial regulations introduced in the wake of the crisis.

Free to step up investor payouts, Barclays analysts estimated the median bank out of the 20 relevant institutions it covers would return over 100 per cent of its earnings to shareholders over the next year, with capital returned to investors approaching $200bn.

Additional reporting by Colby Smith in New York