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HomeBank CapitalD.C. power shift complicates Fed decision on capital rule

D.C. power shift complicates Fed decision on capital rule

WASHINGTON — Pressure continues to mount on the Federal Reserve from both sides as the central bank mulls an extension of temporary capital relief for the big banks.

The Fed last April announced a one-year easing of the supplementary leverage ratio, a tough measure of capital strength, for bank holding companies with more than $250 billion of assets. It was followed the next month by similar moves from other agencies for banks under their watch.

With the Fed’s measure slated to expire on March 31, big banks say they still need the relief to support the economic recovery and ease strains in the Treasury market. But the power shift in Washington following the November election — putting Democrats in control of the White House and Congress — has emboldened voices on the left to push back, saying banks have already had enough of a break.

“It’s an early test of whether the shifting political winds and the new congressional leadership and evolving list of new regulators is going to change the decision making on this,” said Sheila Bair, a former Republican-appointed chair of the Federal Deposit Insurance Corp. “I hope it does.”

The supplementary leverage ratio, or SLR, is an extra cushion imposed on the biggest banks, measuring their capital against their entire balance sheets. The temporary steps announced last spring allowed banks to exclude Treasuries and reserves held at the Fed from the SLR calculation, enabling them to expand their balance sheets and help the support the economic during the coronavirus pandemic.

Fed Chair Jerome Powell told lawmakers Feb. 23 that the central bank had not reached a decision on an extension yet. Some believe President Biden's victory in November and Democrats' gaining control of the Senate could factor into whether to extend the capital reprieve.

Fed Chair Jerome Powell told lawmakers Feb. 23 that the central bank had not reached a decision on an extension yet. Some believe President Biden’s victory in November and Democrats’ gaining control of the Senate could factor into whether to extend the capital reprieve.

Bloomberg News

The industry says the relief should remain in place as banks and the government continue to respond to economic need resulting from COVID-19.

“Members believe that the extension of the [Fed’s interim final rule] is critical to the continued ability of banking organizations to continue accepting deposits and acting as intermediaries in the U.S. Treasury market,” according to a Feb. 23 letter to the central bank by three financial services trade groups.

But key Democrats and other big-bank critics have come out strongly against the Fed and the agencies prolonging the relief. They argue that a further capital reprieve is unnecessary as long as banks continue to pay dividends to their shareholders.

“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,” said Senate Banking Committee Chair Sherrod Brown, D-Ohio, and Sen. Elizabeth Warren, D-Mass., in a Feb. 26 letter to the heads of the agencies.

Banks subject to the SLR must maintain a minimum 3% ratio against their total leverage…

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