Risk & Compliance

Fed Nixes Further Capital Relief for Banks

The Fed's decision means banks can no longer exclude Treasury bonds and deposits held at the central bank from their supplementary leverage ratio.
Matthew HellerMarch 19, 2021

Story updated Monday, 4:50 p.m. EDT

Bank stocks fell on Friday after the U.S. Federal Reserve said it would not extend a temporary regulatory change that loosened capital requirements in response to the coronavirus pandemic.

The Fed last April allowed banks to exclude Treasury bonds and deposits held at the central bank from their supplementary leverage ratio (SLR), which measures capital as a percentage of loans and other assets, in a move to ease Treasury market stress and encourage lending to consumers.

The banking industry had hoped the exclusion would stay in effect, arguing that there was still plenty of uncertainty swirling around the economy and the pandemic. But the Fed said Friday it will expire on March 31 as scheduled.

“The Treasury market has stabilized,” it said in a news release.

Shares of the largest U.S. banks fell after the news, with JPMorgan Chase losing as much as 4% before closing down 1.6% on the day. Bank of America and Citigroup lost 1% and 1.1%, respectively.

Democratic lawmakers welcomed the Fed’s decision. “This is a victory for lending in communities hit hard by the pandemic, and for the stability of our financial system,” said Sen. Sherrod Brown, Ohio Democrat, who had previously warned the Fed that extending the exemption would be a “grave error.”

But the Fed also indicated it was open to a broader revamp of the SLR, citing the “recent growth in the supply of central bank reserves and the issuance of Treasury securities” to pay for federal virus relief spending and other Biden administration priorities.

“This is not a disastrous outcome, but it is not optimal in our view either,” Krishna Guha, vice chairman of investment banking advisory firm Evercore ISI told The Wall Street Journal.

Bank’s leverage ratios are expected to remain well above the minimum SLR requirement for bank holding companies and their main operating bank subsidiaries, Fitch Ratings said in a note on Monday.

Inclusive of the relief, the average SLR capital ratios for the largest U.S. banks was 7.25% on Dec. 31, 2020, Fitch said, up from 6.43% a year earlier. The minimum requirement for such bank holding companies is 5%. If breached, it would require banks to seek approval to make capital distributions.

The leverage ratio was adopted after the 2007-2009 financial crisis as a safeguard to prevent big banks from manipulating other capital rules. “Now we need to make sure the giant banks don’t try to sneak in a back-door reduction in their capital requirements. This is too important,” Sen. Elizabeth Warren, Massachusetts Democrat, tweeted.

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