Agencies encourage banks to use their capital to boost lending

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WASHINGTON — The federal banking agencies took steps to encourage financial institutions to dip into capital and liquidity coffers as households and businesses cope with the economic challenges of the coronavirus.

The regulators issued a joint statement Tuesday that they support banks “that choose to use their capital and liquidity buffers to lend and undertake other supportive actions in a safe and sound manner.” The statement was similar to one issued solely by the Federal Reserve Board over the weekend.

The extra capital and liquidity cushions that banks built following the 2008 financial crisis “were designed to provide banking organizations with the means to support the economy in adverse situations and allow banking organization to continue to serve households and businesses,” according to the joint statement by the Office of the Comptroller of the Currency, Fed and Federal Deposit Insurance Corp.

The agencies also issued an interim rule that makes a technical change to banks’ capital requirements. The rule, which revises the definition of “eligible retained income” aims to soften the impact of regulatory restrictions on capital distributions in order to enable banks to more easily reduce their capital levels.

The capital buffers “were designed to provide banking organizations with the means to support the economy in adverse situations," the OCC, Fed and FDIC said in a joint statement.
The capital buffers “were designed to provide banking organizations with the means to support the economy in adverse situations," the OCC, Fed and FDIC said in a joint statement.

“The interim final rule … addresses the impact of recent dislocations in the U.S. economy as a result of COVID-19,” the agencies said in the new regulation. “By modifying the definition of eligible retained income and therefore allowing banking organizations to more freely use their capital buffers, this rule should help to promote lending activity and other financial intermediation activities by depository institutions, bank holding companies, and savings and loan holding companies and avoid compounding negative impacts on the financial markets.”

Read more: Complete coverage of the coronavirus impact

In their joint statement, the agencies’ noted that the largest banks hold $1.3 trillion in common equity and $2.9 trillion in high-quality liquid assets, which is well in excess of their regulatory minimums.

The new actions Tuesday were accompanied by the Fed’s announcement that it was reviving a financial crisis-era facility that provides a backstop to the commercial paper market.

On Sunday, the Fed separately took steps effectively slashing the federal funds rate to zero, as well as urging financial institutions to use their capital buffers to support lending.

"These capital and liquidity buffers are designed to support the economy in adverse situations and allow banks to continue to serve households and businesses," the Fed statement said.

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Capital requirements Regulatory relief Liquidity requirements Coronavirus FDIC OCC Federal Reserve
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