Fed's Powell makes case why Congress should relax bank capital rule
WASHINGTON — If Congress provides temporary relief from a key bank capital rule as part of the next stimulus package, banks would be able to grow their balance sheets and better serve their customers amid the global pandemic, Federal Reserve Chair Jerome Powell said Wednesday.
Senate Republicans are considering whether to ease the so-called Collins amendment in their $1 trillion Health, Economic Assistance, liability Protection and Schools Act to give the Fed the authority to adjust the Tier 1 leverage ratio for banks. The amendment was included in the 2010 Dodd-Frank Act to help strengthen large banks' balance sheets.
“Many, many bank regulators around the world have given leverage ratio relief,” Powell said at a news conference following a meeting of the Federal Open Market Committee. “What it's doing is allowing [banks] to grow their balance sheet in a way that serves their customers.”
That Collins amendment imposed a fixed risk-based capital floor, but some bank regulators have suggested that provision is straining banks' ability to handle an influx of deposits in the stressed economic environment.
Those deposits cause "banks run up against their leverage ratio, which is a non-risk sensitive measure just of the amount of assets on the balance sheet,” Powell said.
The Fed in April sought to address that problem by temporarily allowing banks to exclude Treasury securities and deposits held at Federal Reserve banks from the calculation of their supplementary leverage ratios.
Congress already tweaked the Collins amendment in 2014, clarifying that it does not apply to insurance companies. But Fed Vice Chairman for Supervision Randal Quarles has urged lawmakers to go even further to enable the Fed to lower the statutory capital floor.
"Congress has amended ... [the Collins amendment] before, recognizing the complications it presents in tailoring a capital regime to a diverse financial sector and to changing risks in the financial system over time," Quarles said in an April 22 letter to Senate Banking Committee Chairman Mike Crapo, R-Idaho.
Powell added Wednesday that any statutory change should be temporary. There is also no guarantee that the Fed would use such authority from Congress to relax the capital rule, he said.
“If Congress chooses to do this, we would want it to be explicitly temporary,” said Powell. “This will not be a permanent change in capital standards.”
Some banking trade groups like the Bank Policy Institute have been urging Senate Republicans to revise the Collins amendment.
But proponents of the Dodd-Frank Act have expressed concern that easing bank capital requirements could pose a risk to financial stability.
“Wall Street’s biggest banks are lobbying to weaken capital requirements and increase their leverage in the face of unprecedented uncertainty and at the very same time they are ejecting tens of billions of dollars in dividend payments each quarter,” said Better Markets President and CEO Dennis Kelleher in a July 28 letter to the Senate Banking Committee.
Powell also acknowledged that some of the Fed's emergency lending facilities to help companies hurt by the pandemic, including the Main Street Lending Program, have not yet attracted much interest from borrowers.
“We haven't done as much lending as we thought,” Powell said, but he added that “it's important that the facilities stay in place until we're very confident that that the turmoil from the pandemic and the economic fallout are behind us.”
On Tuesday, the Fed announced it would extend the life of seven of its emergency lending facilities through the end of 2020. Previously, those facilities had been set to close in September.
Powell also offered an update on the U.S. coin shortage that has prompted some banks to offer customers incentives for bringing in their change.
“We've been working to try to reverse that disruption in the supply chain and restore normal circulation for our coins, so we're working with the U.S. Mint which is the issuing authority to address the issue,” he said.
Last week, the U.S. Mint issued a statement urging Americans to "start spending their coins, depositing them or exchanging them for currency at financial institutions.”
Powell says he believes the Fed and the Mint are making progress on the shortage.
“We're in frequent communication with the banks and with the armored carriers, trying to get back to where we need to be, so we do think the inventories are building up,” he said.