WASHINGTON — Two top Democrats on the Senate Banking Committee are urging bank regulators not to extend relief for the largest institutions from a key capital requirement.
To help banks support the economic recovery, the agencies took steps last year to ease compliance with the supplementary leverage ratio, a rigorous measure of their capital relative to their entire balance sheet. That relief is set to expire at the end of this month.
But as some banks plead with regulators to allow for more time, Senate Banking Committee Chair Sherrod Brown of Ohio and Sen. Elizabeth Warren of Massachusetts said in a Feb. 26 letter to the heads of the agencies that that would be “a grave error.”
“The banks’ requests for an extension of this relief appear to be an attempt to use the pandemic as an excuse to weaken one of the most important post-crisis regulatory reforms,” the lawmakers wrote to the heads of the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency.
The industry has argued that, without the relief, it is difficult for banks to absorb the influx of deposits in the system and still reach the minimum SLR. But if that is the case, Warren and Brown argued, regulators could take other steps besides easing the capital measure, such as strengthening restrictions on shareholder payouts.
“To the extent there are concerns about banks’ ability to accept customer deposits and absorb reserves due to leverage requirements, regulators should suspend bank capital distributions,” the senators wrote.
The SLR requires banks with more than $250 billion of assets to maintain an extra cushion of high-quality capital against their total assets. Banks must maintain a minimum 3% ratio against their total leverage exposure. The ratio is 5% for the largest bank holding companies.
The Fed and other agencies last spring allowed banks subject to the SLR to exclude U.S. Treasury securities and deposits at Fed regional banks from the calculation of the ratio. The exemptions, set to expire March 31, were meant to free up resources to make loans and alleviate stress in the Treasury market.
But Warren and Brown said there was little evidence the SLR relief led to more lending, noting that the “share of banks’ assets devoted to loans is now at a 36-year low.”
Banks should be focused on conserving capital in preparation for potential losses, they said.
“During the last three recessions, banks’ loan losses did not peak until at least a year after the start of the recession,” the letter said. “Reducing banks’ capital reserves needed to absorb these potential losses could result in significant risks to banks and to the stability of the financial system.”
Warren and Brown also suggested that if regulators were concerned about banks’ lending capacity, they could instead put more restrictions on the money that institutions pay out to shareholders.
“Banks could fund their balance sheet growth in part with the capital they are currently sending to shareholders and executives,” they wrote.
Fed Chair Jerome Powell
“We have not decided what to do there yet, and we’re actually looking into that right now,” Powell said.
