Senators Reject Extension Of Capital Exemptions For Large Banks, Companies

Senator Elizabeth Warren (D-Mass.), member of the Senate Banking Committee, and Senator Sherrod Brown (D-Ohio), Chairman of the Senate Banking Committee, sent letters on Friday, February 26, 2021, to Federal Reserve Chairman Jerome Powell, Vice Chair Randal Quarles, Federal Deposit Insurance Corporation Chairman Jelena McWilliams, and Acting Comptroller Blake Paulson calling on the regulators to end the temporary reduction in banks' capital requirements and resist pressure from the big banks for an extension in the deregulation.

The senators warn that because the pandemic-induced economic crisis continues to destabilize the economy, particularly for small businesses and lower-wage earners, it is imperative that banks maintain a cushion against potential losses.

On April 1, 2020, the Fed released an interim final rule (IFR) that allowed bank holding companies to exclude U.S. Treasuries and deposits held at Federal Reserve Banks from the calculation of their Supplementary Leverage Ratio (SLR) through March 31, 2021, and subsequently released a joint IFR allowing insured depository institutions to opt-in to this capital carve out -- resulting in a $55 billion reduction of capital requirements for the largest banks. When Senators Warren and Brown wrote in strong opposition to the IFR on June 19, 2020, Vice Chair Quarles and Chairman McWilliams both replied to confirm that the exclusion will expire on March 31, 2021.

However, recent reporting from the Financial Times indicated that "the banks and industry representatives had been in talks with the Fed to extend the exemption beyond March." It is unclear whether the OCC and the FDIC are engaged in similar discussions.

In their letter, the senators urged the regulators to "reject the coordinated lobbying efforts of the country's largest banks..." "This temporary rule substantially weakens one of the most important regulatory requirements for large banks put in place after the 2007-2008 financial crisis. You should restore those requirements as quickly as possible," the senators wrote.

Their letter points to the many signs the pandemic continues to destabilize the economy: "employment remains down 17 percent for the lowest-wage earners since last February, and small businesses across the country are still struggling," they wrote. The Federal Open Market Committee's January 26-27 minutes note that financial stability risks remain "notable," citing "vulnerabilities associated with household and business borrowing...reflecting increased leverage and decreased incomes and revenues in 2020.

"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 senators concluded. "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. Banks could fund their balance sheet growth in part with the capital they are currently sending to shareholders and executives. We are also confident that the thousands of community banks that are not subject to the SLR requirements would be happy to accept deposits that large banks may reject."

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February 26, 2021

To: The Honorable Jerome Powell, Chairman, Board of Governors of the Federal Reserve System, 20th St and Constitution Avenue NW, Washington, D.C. 20551

The Honorable Blake Paulson, Acting Comptroller of the Currency, Office of the Comptroller of the Currency, 400 7th St. SW, Washington, DC 20219

The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of Governors of the Federal Reserve System, 20th St and Constitution Avenue NW, Washington, D.C. 20551

The Honorable Jelena McWilliams, Chairman, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429

Dear Chairman Powell, Vice Chair Quarles, Chairman McWilliams and Acting Comptroller Paulson:

We write to ask that you reject the coordinated lobbying efforts of the country's largest banks to convince your respective agencies to extend a temporary rule that reduced banks' capital requirements. This temporary rule substantially weakens one of the most important regulatory requirements for large banks put in place after the 2007-2008 financial crisis. You should restore those requirements as quickly as possible./1

On April 1, 2020, the Federal Reserve Board of Governors (Fed) released an interim final rule (IFR) that allowed bank holding companies to exclude U.S. Treasuries and deposits held at Federal Reserve Banks from the calculation of their Supplementary Leverage Ratio (SLR) through March 31, 2021./2 The Fed, Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) subsequently released a joint IFR allowing insured depository institutions to opt-in to this capital carve out./3 This change resulted in a $55 billion reduction of capital requirements for the largest banks./4/5 The stated rationale for this change was to allow banks to "expand their balance sheets as appropriate to serve as financial intermediaries and serve their customers."/6 The pandemic-induced flight to liquidity by investors and corporations resulted in increased bank deposits and bank demand for safe assets like reserves and Treasuries./7 Regulators indicated that the increase in reserves in the banking system as a result of actions taken to support market functioning during COVID-19, and the influx of customer deposits, would put pressure on banks' balance sheets. Specifically, the IFR noted, "the resulting increase in the size of depository institutions' balance sheets may cause a sudden and significant increase in the regulatory capital needed to meet a depository institution's leverage ratio requirement."/8

The IFR was nominally written to help banks address these - presumably temporary - restraints. But in reality, the relief went well beyond this simple accommodation, exempting all Reserve Bank deposits and Treasury Securities from the calculation, including those that banks held well before the crisis./9 Moreover, it is not at all clear that the rule helped support businesses and households. Recent data suggests that big banks are committing an ever-decreasing portion of their balance sheets to business and household lending: the share of banks' assets devoted to loans is now at a 36-year low./10

On June 19, 2020 we wrote to your agencies to express our strong opposition to the IFR. The responses we received from Vice Chair Quarles and Chairman McWilliams both confirmed that the exclusion will expire on March 31, 2021./11 But recent reporting from the Financial Times indicated that "the banks and industry representatives had been in talks with the Fed to extend the exemption beyond March."/12 It is unclear whether the OCC and the FDIC are engaged in similar discussions.

Extending this exemption from capital requirements at either the bank or holding company level would be a grave error. While employment has largely recovered for the highest-paid workers, employment remains down 17 percent for the lowest-wage earners since last February,/13 and small businesses across the country are still struggling./14 Additionally, the most recent minutes of the Federal Open Market Committee note that financial stability risks remain "notable," citing "vulnerabilities associated with household and business borrowing...reflecting increased leverage and decreased incomes and revenues in 2020."/15 Banks' balance sheets will also likely continue to face pressure from loan defaults in the coming months. During the last three recessions, banks' loan losses did not peak until at least a year after the start of the recession./16 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. Indeed, there was ample evidence before the COVID-19 shock that big bank capital, while improved since the last crisis, was still too low to support long-term sustainable economic growth./17 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. 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. Banks could fund their balance sheet growth in part with the capital they are currently sending to shareholders and executives. We are also confident that the thousands of community banks that are not subject to the SLR requirements would be happy to accept deposits that large banks may reject. It is inexcusable to provide Wall Street with deregulatory capital exemptions while allowing them to pay out tens of billions in capital every quarter through dividends and stock buybacks./18 Those capital distributions could instead be used to support over a trillion dollars in balance sheet growth./19 You and your predecessors at your independent regulatory agencies succumbed to political pressure to weaken these key reforms, creating new risks for the economy and the financial system. You now have the opportunity to rectify these errors and restore bank capital requirements, and you should do so.

Sincerely,

Elizabeth Warren, United States Senator

Sherrod Brown, United States Senator

See footnotes here: https://www.warren.senate.gov/imo/media/doc/2021.02.26%20Letter%20to%20Regulators%20on%20SLR%20Extension%20(1).pdf