With the stock market reeling due to the outbreak of the coronavirus pandemic, the CEOs of the biggest banks in America were brought to Washington last week to meet with President Trump. Then, on Sunday evening, the Federal Reserve opened up a box of emergency tools not seen since the crisis-era to help the financial system deal with the economic fallout of the pandemic.
A dozen years ago, such scenes were commonplace as banks were brought to their knees by the 2008 crisis. This time, they may be having their moment. The U.S. banking sector is perhaps the best positioned industry to help the country get through the growing economic disruption of the pandemic, and the current turmoil is an opportunity for firms to build new trust across Main Street, Corporate America, and the halls of Congress.
Businesses will need loans and short term credit to get through this crisis. Banks have the financial wherewithal and the regulatory support to pump money into the ailing economy.
The vital role banks will play was underscored on Sunday when the Federal Reserve cut interest rates to between 0%-and-0.25%, lowering rates a full percentage point, and announced a $500 billion increase in its holdings of treasuries and a $200 billion increase to its mortgage-backed security portfolio. Beyond the headline numbers, the Fed’s emergency move also came with new measures to make it easier for banks to lend, which may prove even more important.
The regulator made it clear to every bank CEO in America it will be supportive of firms that use their strong financial position to lean in and help customers. “Since the global financial crisis of 2007-2008, U.S. bank holding companies have built up substantial levels of capital and liquidity in excess of regulatory minimums and buffers,” the Fed said Sunday, noting large banks have $1.3 trillion in common equity and hold $2.9 trillion in high quality liquid assets.
“These capital and liquidity buffers are designed to support the economy in adverse situations and allow banks to continue to serve households and businesses,” it said, and stated: “The Federal Reserve supports firms that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner.” Were the Fed to formally suspend these capital and liquidity buffers, it would free up “trillions of dollars of lending capacity,” according to analysts at research firm Keefe Bruyette & Woods.
In addition to the supportive tone, the Fed lowered its primary credit rate by 1.5% to 0.25% to encourage banks to turn to its so-called ‘discount window’ to meet borrowers’ demands….