Big banks may get a big gift in the stimulus bill being drafted by Senate Republicans.
Lawmakers are expected to include language that would give the Federal Reserve authority to relax a requirement surrounding capital levels at the biggest banks, essentially allowing firms to load up on riskier assets, according to three people familiar with the effort.
The push is the culmination of a monthslong effort by industry lobbyists and a top Federal Reserve official to change a restriction put in place in the wake of the 2008 financial crisis to prevent banks from engaging in risky behavior.
Right now, banks must count all assets — including relatively safe ones like customer deposits that banks choose to park at the Federal Reserve and Treasury securities — when calculating the level of capital they must hold against the overall amount of those assets. That so-called leverage ratio is supposed to constrain risk-taking by ensuring banks have enough capital on hand in the event of a severe downturn, when even the safest kinds of assets may carry unanticipated risks.
Senator Mike Crapo, Republican of Idaho and chairman of the Senate Banking Committee, is working on legislation that would give regulators the discretion to let banks exclude certain items on their balance sheets when calculating how much capital they are required to hold.
The change could allow banks to be less conservative in their risk-taking than in recent years. It could be particularly useful for banks with large Wall Street trading operations, because it would let them increase their holdings of certain kinds of financial assets, like government bonds, without requiring a corresponding increase in capital reserves.
Critics say the leverage ratio is blunt, because it in effect views United States government bonds as risky as, say, credit card loans. But backers of the leverage ratio say there are times when even the safest assets can be risky for banks to own. There was evidence for this during the turmoil in the markets in March, when Treasuries were sold off, a major reason the Fed stepped in to support markets.
The plan to slip the change into a pandemic relief package has not been made public, but the overall effort to loosen the rule is far from secret. Mr. Crapo has been engaged for months in a public discussion of the issue with Randal K. Quarles, a Federal Reserve vice chair who has said that the change would help banks and regulators to better respond to financial market stresses.
A spokeswoman for Mr. Crapo declined to comment. A Fed spokesman declined to comment.
Sean Oblack, a spokesman for the Bank Policy Institute, a trade group that has been pushing for the change, said relaxing the requirement would “enable banks to increase lending and support the economic recovery.”
But critics, including Senate Democrats, say it will give big banks freer rein to engage in the kinds of behaviors that led to the last financial crisis.
“Republicans and regulators are taking advantage of this health crisis to roll back bank capital standards so big bank C.E.O.s can line their pockets while putting our financial system at risk,” said Senator Sherrod Brown of Ohio, the Senate Banking Committee’s highest-ranking Democrat. “Senate Republicans are more interested in helping Wall Street than they are in helping Main Street and the workers who keep our economy running.”
Banks have made huge profits in recent years and had no difficulty in meeting their capital requirements, allowing them to pay out billions of dollars in excess capital to their shareholders through stock buybacks and dividend payments.
But banks say that leverage requirements can cause them to stop accepting new deposits and other securities during times of stress. The Fed temporarily exempted Treasuries and reserves from one important leverage ratio — the supplemental leverage ratio — in early April, saying that the move would help to “ease strains in the Treasury market.”
The Fed cannot relax the leverage ratio under discussion — known as the so-called Tier 1 leverage ratio — because of restrictions written into the Dodd-Frank law. Mr. Quarles, who oversees the Fed’s bank supervision, has flagged that limitation as a potential problem.
“Congress should consider modifying” the amendment “to allow regulators to provide flexibility under Tier 1 leverage requirements as banks respond to increased credit demands,” he wrote in an April 22 letter to Mr. Crapo. He said that as deposits flowed in, “the ability of these banking organizations to continue accepting significant deposits may become constrained due to Tier 1 leverage requirements.”
If the Fed does gain authority to reduce the leverage ratio, it is not clear whether the change would be permanent — so far, the Fed has only temporarily eased restrictions. But former regulators worry it could open the door to permanent changes that could chip away at banks’ protections.
“It would give the agencies discretion to lower capital ratios beyond where they were in 2008,” said Jeremy Kress, a former member of the Fed’s regulatory staff who now teaches at the University of Michigan. “That can’t be good.”
Mr. Kress said that it would be better to consider a more tailored fix, like temporarily exempting new customer deposits from the leverage ratio, rather than paving the way for blanket exemptions.
“The downside risks of toying with the Tier 1 Leverage Ratio is a much greater risk to financial stability,” he said.
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