What's going on?

The US Federal Reserve (the Fed) has finally released frustrated US banks from its lockdown on dividends and share buybacks, and they can�t wait to go wild.

What does this mean?

With so much uncertainty at the height of the pandemic, the Federal Reserve (the Fed) froze banks� share buybacks and dividends to make sure they had enough cash to see them through. Fast forward to this year�s annual �stress test�, and the Fed�s been assessing how those banks would cope if � among other things � there was a severe global recession, a more than 50% drop in the stock market, and a spike in unemployment.

The Fed concluded that US banks by and large had enough money in reserve to survive � unsurprising, considering that doomsday scenario mostly played out last year. And once it gave the okay to start payouts again, there was no hanging around: Morgan Stanley and Wells Fargo quickly doubled their quarterly dividends, and announced up to $12 billion and $18 billion of share buybacks respectively.

Why should I care?

For markets: Value investors told ya so.

Bank stocks tend to do better when interest rates are high, since they make more money from loans than it costs them to borrow. Rock-bottom interest rates, then, have made it harder for banks to earn as much, which � along with absent payouts � might be why investors sold off their shares last year. So investors who bought back then don�t just benefit from higher cash payouts: the stocks themselves are worth a lot more since the banks� announcements earlier this week.

For you personally: There�s still value in European banks.

European banks are doing well too, with one key index up 76% from its September lows. But that index is still below pre-pandemic levels, and banks� earnings are looking promising: trading desks are likely benefiting from buoyant financial markets, while rising bond yields should make it more profitable for banks to lend (tweet this).