But this crisis has now led regulators to go even further to weaken those rules in an all-out effort to help banks make as many loans as possible to keep the economy going. The question now becomes whether these actions are only necessary in the depth of the pandemic-induced crisis, or whether they will help banks make the case for lasting rollbacks.
“While our federal regulators, agencies and financial institutions must take action to protect consumers and our economy, I must emphasize that it is unacceptable to use this crisis as an excuse to justify rollbacks of important financial regulations that are in place to protect our financial system and economy,” Waters, who chairs the powerful House Financial Services Committee, said last month.
Large banks in particular have long pushed to make it less expensive to hold cash and U.S. government bonds under one capital rule that requires lenders to treat all assets as equally risky, to prevent regulators from overlooking unexpected risks.
That demand has become more pressing in the crisis as banks see an influx of deposits as people seek the safety of cash and as they play a key role in making sure the market for Treasury securities — which influences all other debt markets — is still working properly. The Fed agreed to exempt reserves and Treasuries from that rule last week.
But some financial experts warn that move could weaken banks’ ability to weather a longer downturn because it allows them to have less of a buffer against future financial hits. They also warn that making the change permanent could leave the door open for further carveouts that would undermine the rule.
Gregg Gelzinis, a senior policy analyst at the Center for American Progress, called it a “huge failure” that regulators didn’t push banks to further raise capital requirements before this crisis, in the face of increasing risks to the economy like record high debt held by nonfinancial businesses.
That makes it more dangerous for regulators to now lower capital requirements — giving them flexibility to fund more of their operations through debt, he said.
“This is the clearest area where a failure to act before the crisis has led to them making some pretty harmful decisions,” he said. If they had raised capital standards last year and then lowered them in response to the pandemic so that banks could lend more, “I wouldn’t have been criticizing the Fed for taking that step, and banks still would’ve had a significant cushion to withstand future losses.”
But banks, for their part, argue that they shouldn’t be penalized for holding assets like cash and U.S. government debt, which are considered completely safe investments.
They say they still face other steep capital requirements to absorb losses on riskier investments. And they say it’s natural for big banks to be taking on a lot more deposits during times of economic stress.
“If you’re thinking about the safety and soundness of the banking system, it should not be a great concern that there’s been a flight to quality,” said Greg Baer, president and CEO of the Bank Policy Institute, which represents big banks.
The Fed’s fellow bank regulators, the FDIC and the Office of the Comptroller of the Currency, have not taken similar steps that would further reduce capital requirements. But the Fed and the OCC also previously have suggested that their preference ultimately would be to ease this particular capital rule in a way that doesn’t carve out any assets, even the safe ones.
Congress, meanwhile, in the record $2 trillion coronavirus relief package passed last month, made it easier for community banks to escape more complicated capital rules, a step that could help some smaller lenders increase their debt load.
But Chris Cole, executive vice president at the Independent Community Bankers of America, said banks would be more likely to take advantage of the temporary rule change because it’s simpler and therefore saves costs, not to reduce loss-absorbing capital levels.
“This will be kind of a proving ground“ to show that the looser rules work, he said.
Congress also allowed banks to delay implementation of an accounting standard that would have required them to record potential losses immediately upon making a new loan, a major victory for large regional banks that argued it would crimp lending in a downturn.
“Banks have been pushing for these changes for years, and now that they have an opportunity to realize the benefits of these changes on a temporary basis, they’re going to be fighting tooth and nail to make sure these changes remain in place beyond this crisis,” Gelzinis said.
Source: politico.com
See more here: news365.stream
