The Federal Reserve on Friday highlighted the strength and resiliency of banks of all sizes, including large financial institutions, entering into the global pandemic. The central bank, in its regular Supervision and Regulation report, noted actions taken by banking regulators and the industry in the past decade had led to vast improvements in the banking sector. “As a result, the banking industry entered the current crisis well positioned to support continued lending,” the Fed said.
Following are three key takeaways from the Fed’s report as they relate to the eight members of the Financial Services Forum:
1. Strong capital and liquidity
“Banks are better capitalized and hold more liquidity,” the Federal Reserve said. “The industry is characterized by better capital and liquidity planning and improved risk-management capabilities at banks of all sizes.”
The eight members of the Financial Services Forum have increased their Tier 1 capital by more than 40 in the past decade. Capital acts as a buffer for banks to absorb unexpected losses.
Source: Federal Reserve Y-9C
Liquidity at the Forum member banks, meanwhile, has more than doubled in the past 10 years. Liquidity is important because it acts as a measure of the ease with which a bank could meet immediate requests for funding from customers.
Source: Federal Reserve Y-9C
2. Market indicators point to health of large banks
The Federal Reserve also discussed insights seen from market-based indicators of the health of the banking sector, including the market leverage ratio and credit default swap spreads. While both indicators started to deteriorate in February, “neither indicator reached the extremes of the 2008 financial crisis,” the Fed said. “This may reflect the belief by investors that banks are more resilient and better positioned today than during the 2008 financial crisis.”
3. Actions by Fed maintain integrity of post-crisis regulatory system
Finally, the Federal Reserve report outlines the actions taken by the central bank and others to boost the economy in the face of the global pandemic, while stressing that despite these measures, the integrity of the post-crisis financial system remains very much intact.
“The actions use existing flexibility in the regulatory and supervisory framework and do not roll back the measures that allowed the banking sector to enter this crisis as a source of strength to support the continued flow of credit to households and businesses,” the Federal Reserve said. “The regulatory and supervisory actions taken by the Federal Reserve since March are intended to help financial institutions deploy their resources as efficiently as possible while continuing to support their customers and local economies in a prudent and fair manner.”
The COVID-19 global pandemic created an unprecedented economic shock – businesses and consumers across virtually every sector, in every corner of the economy and in every community in the country are struggling. As the Federal Reserve said in its regular Supervision and Regulation report, however, Forum members entered this crisis in a strong position, marked by huge capital and liquidity cushions and enhanced risk management.
The nation’s largest banks are supporting their employees, customers, clients, communities and the economy in myriad ways in 2020. The strength and resilience of these institutions means these banks are positioned to continue to provide robust support to the economy for months to come.