Connect with us

Latest

Regulators reject Wall Street’s calls to extend Covid relief for big banks

Published

on

[ad_1]

JPMorgan Chase (JPM), Wells Fargo (WFC) and other large bank stocks retreated to the news, which helped reduce the Dow to about 300 points, or 1%. U.S. Treasury yields also rose, weighing on broader markets.
Last spring, when the economy and markets were in chaos, the Federal Reserve handed over a kind of “get out of prison” card to the big American banks: it loosened the leverage rules that JPMorgan, bank of america (BAC) and other large lenders must comply with them.
But on Friday, U.S. regulators said yes they allow the leverage exemption to expire at the end of the month, explaining that the “temporary change was made to provide flexibility” to banks, allowing them to continue to provide credit to households and businesses during the pandemic.
The Fed too announced will attempt to rework the leverage rule to ensure that it remains effective in the current environment.

Elizabeth Warren weighs

The decision remains pressure from leading Democrats who were worried, the big banks were using the pandemic as an excuse to weaken post-2008 crisis rules.

Senator Elizabeth Warren applauded Friday’s move as the “right decision to keep our banking system strong,” but also noted tension.

“Now we need to make sure that giant banks don’t try to sneak in a reduction in their capital needs through the back door,” the Massachusetts Democrat said in tweet. “That’s too important.”
Big banks like JP Morgan and Citigroup (C) it had been urging regulators to take over, if not make it permanent. And some Wall Street analysts warned that not extending the exemption could lead to a destabilizing rise in bond yields if US banks decide to move away from the Treasury market.

This is how the exemption worked: last spring, the Federal Reserve, the FDIC and the Office of the Currency Controller had granted a major waiver to the big banks, allowing them to group together in ultra-safe treasures of the States. United and take an increase in deposits without the usual penalty.

These penalties are usually charged when banks reject rules about what is known as supplementary leverage ratio or SLR. It requires the largest U.S. banks to have a capital of at least 5% of total assets on and off their balance sheets. It is essentially a forced buffer, with the goal of preventing banks from taking too much advantage.

But with the pandemic plummeting, the Fed announced on April 1 that it would temporarily exclude U.S. Treasuries and Fed bank deposits from the SLR calculation.

The “heated” debate began in the stimulus

The moves were aimed at giving banks more firepower during the recession and easing emerging tensions in the treasury and replenishment markets.

“The reason this issue even became so intense is solely because the Treasury issues so much debt to fund Congress spending habits,” Peter Boockvar, investment director of the Bleakley Advisory Group, wrote in a note to customers Friday.

The US economy can & # 39;  definitely & # 39;  supports tax hikes, says Rick Rieder of BlackRock

Boockvar added that the Fed’s bond-buying program, known as quantitative easing, simultaneously creates reserves that banks must absorb.

The Fed acknowledged these challenges and said that “the current design and calibration of SLRs may need to be addressed over time to prevent strains from developing that could limit economic growth and undermine financial stability.”

The central bank plans to invite the public to comment on various changes to the leverage rule, but promised that any changes will not “erode the overall soundness of bank capital requirements.”

This reform process could end up causing some bank reserves to be “permanently exempt” from the leverage rule, according to Jaret Seiberg, a policy analyst at Cowen Washington Research Group.

“It’s weird that big banks are being punished because the Fed and Congress want to stimulate the economy. Still, that’s the way it is today,” Seiberg wrote.

Here come the rewards?

Although bank shares fell in the news on Friday, there could be a silver line for Wall Street: allowing relief to expire could ease pressure on the Fed to limit bank dividends and stock amortizations .

“This puts out of play the biggest political impediment for the Fed to remove all Covid-19-related restrictions on large distributions of bank capital,” Seiberg wrote.

But leading Democrats are already showing caution to allow big banks to return too much money to shareholders.

Senator Sherrod Brown, chairman of the Senate Banking Committee, hailed Friday’s announcement as a “victory” for financial stability, but added: “I will continue to fight for regulators to prioritize the real economy over depreciation and dividends “.

.

[ad_2]