Monday, 13 April 2020

Senators urge Fed to end capital distributions during coronavirus pandemic

By J. Preston Carter, J.D., LL.M.

Senators Sherrod Brown (D-Ohio), Brian Schatz (D-Hawaii), and Elizabeth Warren (D-Mass) sent a letter to Federal Reserve Board Chairman Jerome Powell calling for the Fed to prohibit banks with more than $50 billion in assets from making further capital distributions, such as stock buybacks and dividends, as the economy recovers from the coronavirus pandemic. The senators urged the Fed "to do more to help small business owners and hardworking families instead of allowing Wall Street to take advantage of the crisis to skirt important financial protections." The senators wrote, "Ending capital distributions now will refocus these banks on their core mission: lending into their communities, a critical goal during these difficult economic times."

According to the senators, higher capital requirements support increased lending activity, as capital is the critical funding mechanism for all banking activity. "The evidence is clear," they wrote, "banks with greater amounts of loss-absorbing capital lend more, in good times and in bad, and well-capitalized banks are far more likely to survive in a stressed environment without requiring a government bailout."

Therefore, the senators found it "hard to understand" recent actions of the Fed. For example, they wrote, as recently as March, in the midst of the pandemic, the Board took steps to reduce capital standards when it proposed eliminating the requirement that banks pre-fund buybacks and dividends. Also, the Fed has given large banks "far too long" to adopt reforms for recognizing expected losses under the current expected credit loss methodology.

"Perhaps most concerning," the senators stated, "the Board has rolled back one of the most important capital standards for the biggest, riskiest banks in the country." The supplementary leverage ratio is a simple rule based on direct experience from the financial crisis. More equity capital means safer banks and a more stable financial system. "The Board’s decision to reduce this capital requirement by two thirds at banks with more than $250 billion in assets further harms our financial system," the letter states.

Brookings blog. A Brookings Institution blog post says that banks’ higher capital and liquidity positions now than in 2007 is allowing banking regulators to encourage banks to use their capital and liquidity buffers to support new lending, and to work with borrowers to modify existing loans. The blog post notes that the Fed reduced the leverage ratio capital requirement, which should promote more lending, and added that "Banks should collectively agree now to suspend share repurchases for at least as long as the leverage ratio is eased."

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