Warren and Brown to Regulators: It Would be a Grave Error to Extend Capital Exemptions for the Nation's Large Banks and Holding Companies
"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"
Washington, DC - United States 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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