WASHINGTON — The Federal Reserve said Friday it would not extend the temporary regulatory relief it granted to large banks as the pandemic threw the economy into disarray.
Put in place a year ago, the change loosened banks’ capital requirements to encourage them to continue lending as financial markets appeared shaky. The temporary move allowed banks to exclude U.S. Treasurys and central bank reserves when calculating their Supplementary Leverage Ratio, a key measurement of a bank’s risks tracked by regulators.
The banking industry had pushed regulators to keep the change in place, while Democrats urged the Fed to reimpose more stringent regulations. The Fed said it will let the relief expire March 31, now that the markets are on more solid footing.
Fed officials said they were confident that doing so would not hamper the markets. The largest banks have about $1 trillion in capital, and ending the regulatory relief will only slightly shift those levels, Fed officials said.
But the Fed opened the door to making longer-term changes to the Supplementary Leverage Ratio, which emerged from reforms put in place after the Great Recession that sought to keep banks from taking on too much risk. The timeline for that process is not yet clear.
“The Board may need to address the current design and calibration of the SLR over time to prevent strains from developing that could both constrain economic growth and undermine financial stability,” the Fed said in a statement.
The bigger concern is how the Fed will approach permanent changes to the ratio – and whether it can do so without easing up on the industry, said Jeremy Kress, an expert on financial regulation at the University of Michigan and a former Fed lawyer. It will likely require cooperation with other financial regulators, he noted.
“The devil is going to be in the details,” Kress said. “I’m comforted by the Fed’s statement saying any changes would not undermine the resiliency of the banking system. But we have heard that commitment in the past.”
The Fed’s decision to allow the emergency pandemic relief to expire was also supported by Democratic lawmakers who have said Wall Street needs tougher oversight to ensure banks are strong enough to guard against future downturns.
“Now we need to make sure the giant banks don’t try to sneak in a back-door reduction in their capital requirements. This is too important,” Sen. Elizabeth Warren, D-Mass., said in a tweet.
The banking industry had hoped the more relaxed framework would stay in place, arguing that there was still plenty of uncertainty swirling around the economy and the pandemic. Bank stocks dropped after the Fed’s announcement.