Warren and Brown Urge Regulators: Reverse Rule that Weakens Capital Requirements and Makes Banks More Vulnerable to Collapse During this Crisis
"We are baffled that the federal financial regulators granted a long-desired piece of deregulation to the nation's largest banks without sufficient justification to do so, and despite the risks to economic growth and financial stability"
Washington, DC - United States Senator Elizabeth Warren (D-Mass.), Ranking Member of the Senate Banking, Housing and Urban Affairs Subcommittee on Financial Institutions and Consumer Protection, and Senator Sherrod Brown (D-Ohio), Ranking Member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, today raised concerns to the Federal Reserve Board of Governors (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC) regarding recent changes the regulators implemented that weaken a critical regulatory capital requirement for the nation's largest banks. The requirement, known as the Supplementary Leverage Ratio (SLR), is a key component of the regulatory framework that was developed following the 2007-2008 financial crisis to protect the safety and soundness of the financial system.
Capital requirements are a critical tool of financial regulators to ensure that banks maintain a cushion against potential losses and can continue to serve small businesses and households during periods of financial stress. During the last banking crisis, almost 500 banks failed, resulting in $73 billion in costs to the FDIC's Deposit Insurance Fund, due to the banks' failure to maintain adequate levels of capital in the years leading up to the crisis. Following the crisis, financial regulators took steps to strengthen these regulations, and one of the ways they did so was through strong SLR requirements.
The SLR applies to the largest financial institutions and requires them to have capital equal to three percent of a bank's total on-balance sheet assets and off-balance sheet exposures. The SLR rule was finalized in 2014, and banks and their lobbyists have opposed it ever since while pushing for its relaxation or removal.
On May 15, 2020, the Fed, FDIC, and OCC released an interim final rule (IFR) that would allow banks to exclude certain assets from the SLR denominator until March 2021. As a result of this change, banks will be allowed to meet the 3 percent leverage ratio requirement with less capital. Specifically, the amount of capital that the largest banks are required to have will be reduced by $55 billion.
There is no justifiable reason to relax a key safety and soundness restraint by arguing that it is necessary for banks to support lending while simultaneously allowing banks to distribute capital to enrich their shareholders. The IFR does not prohibit banks from continuing to pay dividends despite widespread calls from former federal financial regulators to do so.
"To the families who were affected by the last financial crisis, capital requirements were not some abstract ratio found in the pages of the Federal Register: they represented the difference between families and workers losing their homes, jobs, and livelihoods. The same is true as the country faces a new economic crisis caused by the COVID-19 pandemic. You should reverse this rule and immediately take action to preserve capital at financial institutions to ensure that these institutions are stable and can provide the needed assistance to their customers and to the economy as a whole," the senators concluded.
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