The Federal Reserve's stress tests for big U.S. banks could pave the way for lenders to accelerate their capital distributions to shareholders later this year, analysts say.

Banks' dividend and share repurchase plans have been limited since the COVID-19 pandemic began, but some are looking toward the second half of 2021 for the Fed to lift its restrictions. That would follow the completion of the Fed's latest round of stress tests for big banks, whose health will be tested against a hypothetical stress scenario that is in some ways easier than those of prior Fed examinations.

There are certainly major "pain points" for banks in the tests, including a 55% plunge in stock prices, a 40% hit to commercial real estate prices and the benchmark 10-year Treasury yield sharply falling to 0.25% and therefore crimping banks' revenues, Betsy Graseck, managing director covering large‐cap banks at Morgan Stanley, wrote in a note to clients.

But the hit to GDP is easier compared to past Fed stress tests, and the unemployment rate peaks at 10.8%, compared to the actual peak of 14.8% that the jobless rate saw in April 2020. The jobless rate, however, would stay elevated through 2023 in the stress tests instead of the sharp fall it has seen during what has been a quicker-than-expected recovery. The latest jobs report showed that the jobless rate fell to 6.3% in January.

That all adds up to banks likely getting another clean bill of health in the stress tests this summer, analysts say, which brings the prospect of the Fed lifting its capital payout restrictions in the third quarter. The Fed eased off its limitations in December 2020, allowing for a limited resumption of share buybacks. But it is still restricting banks' buybacks and dividend payouts to banks' net income over the past year.

Graseck expects the Fed to remove those restrictions after announcing the stress test results in June, allowing banks to release some of the excess capital they are holding above regulatory minimums. They will also be able to do so without asking for prior approval from the Fed, whose new capital planning regime ensures banks can return capital as they see fit as long as they do not fall below their new stress capital buffers.

"Boards have not had this type of control over capital returns since 2008," Graseck wrote.

The Fed could face pushback from Democrats on Capitol Hill who have criticized the regulator for allowing capital to flow out of banks despite the COVID-19 pandemic posing significant risk of losses, according to David Feaster, a bank analyst at Raymond James. But a new fiscal relief package from Capitol Hill, combined with vaccinations paving the way for continued economic recovery, could "give the Fed cover" to remove its current limitations, Feaster added.

Nineteen large banks will be subject to the stress tests this year: Bank of America Corp., Bank of New York Mellon Corp., Barclays US LLC, Capital One Financial Corp., Citigroup Inc., Credit Suisse Holdings (USA) Inc., Deutsche Bank AG unit DB USA Corp., Goldman Sachs Group Inc., HSBC North America Holdings Inc., JPMorgan Chase & Co., Morgan Stanley, Northern Trust Corp., PNC Financial Services Group Inc., State Street Corp., TD Group US Holdings LLC, Truist Financial Corp., UBS Americas Holding LLC, U.S. Bancorp and Wells Fargo & Co.

Smaller regional banks that are on a two-year cycle do not have to undergo the stress tests this year, but they can choose to participate and inform the Fed of their intention to do so by April 5.

That would likely "only occur if a bank felt it had a strong case to see better results" in the new stress tests compared to the December 2020 tests, wrote Ken Usdin, managing director, equity research, at Jefferies. Those examinations laid out banks' individual stress capital buffers for the first time.

Usdin and other analysts do not expect many regional banks to opt into the stress tests, although he flagged Buffalo, N.Y.-based M&T Bank Corp. as a candidate after its December 2020 stress tests surprised to the downside.

The bank's domestic commercial real estate losses came in at $6 billion during the December 2020 stress tests, up from $2.2 billion in the examinations last summer. Its CET1 ratio bottomed out at 5% under the December 2020 stress tests, compared with 8.5% in the June 2020 examinations.