Setting the Record Straight on the COVID Response and the Role and Strength of Large Banks

9 Nov 2020

CONTACT: Barbara Hagenbaugh
(202) 457-8783                                                                  
bhagenbaugh@fsforum.com

Washington, D.C. – On November 2nd, Americans for Financial Reform (AFR) called into question recent actions taken by the Federal Reserve to support the economy and preserve jobs during the global pandemic, due to the impact of those actions on the capital position of large banks. Yet the report mischaracterizes both the Federal Reserve’s initiatives and the capital position of large banks. Indeed, as the Federal Reserve said in its most recent Supervision and Regulation report out Friday, banks have acted as “shock absorbers for the real economy,” supporting consumers and businesses while maintaining their strength and safety during these difficult times. The Financial Services Forum below briefly outlines the misleading and inaccurate statements made by the AFR and corrects the record.

1. The report mischaracterizes the design and intent of a recent regulatory modification provided by the Federal Reserve.

On April 1, the Federal Reserve issued an interim final rule that temporarily excludes U.S. Treasury securities and reserve balances held at Federal Reserve banks from the calculation of the supplementary leverage ratio (SLR) for 19 banking organizations. The Federal Reserve made this targeted and temporary modification to the SLR for the express purpose of “easing strains in the U.S. Treasury market and increasing banking organizations’ ability to provide credit to businesses and households.” Moreover, similar changes have been adopted in other jurisdictions in response to the pandemic. In particular, the Bank of England also modified the calculation of its leverage ratio requirements to “support market making and therefore market functioning.”

The AFR report mischaracterizes this temporary modification as a benefit for large banks. But the temporary action is designed to support the entire U.S. economy. Banks are acting as intermediaries that channel credit and liquidity to the economy. Regulators have made a number of temporary and targeted modifications to the bank regulatory regime to support the flow of credit to the economy and this temporary modification to the SLR is no different from any of the other actions taken by regulators to achieve this goal.

Indeed, when asked at a hearing in September if there had been assistance to banks during the pandemic, Fed Chairman Jerome Powell said, “No, I wouldn’t say that there has been.”

2. The report incorrectly states that the six banks identified in the report have a minimum SLR requirement of 5 percent.        

The minimum SLR requirement for the six banks identified in the report is 3 percent, not 5 percent as the authors state. There is an additional 2 percent buffer on top of the 3 percent requirement. This point is important because banks are supposed to be able to maintain capital levels above the minimum (3%) and utilize their buffer (2%) in times of stress to support lending and the economy. The problem with ignoring the purpose of the buffer is that it creates an incorrect perception that any level below 5 percent is in breach of a minimum requirement. Such an incorrect and unhelpful public perception makes it more difficult for large banks to expand their balance sheets and support the economy in difficult times, when such assistance is needed most.

3. The report erroneously claims that large bank trading and investment earnings are “too high” during the pandemic.

This statement ignores the basic fact that large banks have been supporting financial market liquidity and issuance of securities by nonfinancial corporates that are seeking funding during this unprecedented economic slowdown. This provides companies all over the country with the funding they need to continue operating and pay their workers.

In this sense, the increased liquidity and security issuance that has occurred shows that the temporary modification by the Federal Reserve is working — liquidity has improved and companies have greater access to market-based finance. As banks provide additional liquidity and funding, their revenues naturally rise with the elevated level of market activity. To this point, data from SIFMA shows that the amount of corporate bond issuance that has occurred through October 2020 ($2.1 trillion) already exceeds the entire amount of security issuance that occurred in all of 2019 ($1.4 trillion) by 50 percent, or roughly $650 billion.
 
4. The report incorrectly claims that large U.S. banks do not have strong capital positions due to the Federal Reserve’s temporary modification of the SLR.

The report spends a great deal of time arguing that large banks’ capital position is not strong, but this claim is belied by the facts presented in the report itself. This claim is wrong for two reasons.  

First, every bank identified in the report maintains an SLR level that is above the 5 percent “requirement” cited in the report. Looking at the level of the SLR that would apply without any of the temporary modifications shows that, in the aggregate, the six banks identified in the report maintain $154 billion in capital over and above the 5 percent “requirement” cited by AFR.

Second, the SLR is largely a risk-blind capital metric with a number of well-known shortcomings. In particular, reserve balances at Federal Reserve banks have zero risk.  Holdings of U.S. Treasury securities are also low-risk. Accordingly, treating these assets in a risk-blind manner that does not recognize their low level of risk results in a distorted measure of capital adequacy. In this sense, removing these positions from the SLR actually results in a more risk-sensitive and informative capital metric. Risk-sensitive capital metrics show that large banks maintain significant capital in excess of regulatory requirements. As a specific example, as of Q3 2020, Financial Services Forum members maintain $832 billion in capital, which is $146 billion over and above the Federal Reserve’s risk-sensitive stress capital buffer (SCB) requirement.

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The Financial Services Forum is an economic policy and advocacy organization whose members are the chief executive officers of the eight largest and most diversified financial institutions headquartered in the United States.  Forum member institutions are a leading source of lending and investment in the United States and serve millions of consumers, businesses, investors, and communities throughout the country. The Forum promotes policies that support savings and investment, deep and liquid capital markets, a competitive global marketplace, and a sound financial system.

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