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