Democratic senators call for tougher capital requirements for US banks

Two senior Democratic lawmakers have warned the Federal Reserve and other US regulators that it would be a “grave error” to extend looser capital requirements that were introduced for US banks at the start of the pandemic.

The intervention from Elizabeth Warren, the US senator from Massachusetts and former Democratic presidential candidate, and Sherrod Brown, the Ohio senator who chairs the Senate banking committee, has intensified a political battle over the more lenient rules, which are due to expire at the end of the month.

In a letter seen by the Financial Times, Warren and Brown said that maintaining capital relief for the financial sector would “substantially” weaken the tougher regulatory framework that was put in place in the decade following the last global financial crisis. 

The letter from two of the most influential liberal lawmakers in Congress with oversight over Wall Street comes as the Fed, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency must decide whether to extend a temporary rule change to the supplementary leverage ratio, which was introduced in April last year. 

The SLR requires large banks to have capital equal to at least 3 per cent of their assets, or 5 per cent for the largest, systemically important institutions.

Regulators softened the rules at the beginning of the pandemic due to fears that balance sheet constraints would hamper banks’ ability to step in to stabilise volatile financial markets and lend to struggling businesses and consumers. The Fed allowed large banks to temporarily exclude holdings of US Treasuries and cash kept in reserve at the central bank from their assets when calculating the SLR.

The looming deadline has amplified a political split on the issue, with Republicans, banks and industry executives pushing for an extension of the measures while Democrats are calling for them to expire.

“You and your predecessors at your independent regulatory agencies succumbed to political pressure to weaken these key reforms, creating new risks for the economy and the financial system,” Warren and Brown wrote to regulators on Friday. “Extending this exemption from capital requirements at either the bank or holding company level would be a grave error.”

Banks have cautioned that a failure to extend the relief could make it more difficult for them to absorb the deluge of cash the Fed is pumping into the financial system as well as to facilitate trading in US government debt. They also said it could limit their ability to extend credit to cash-strapped companies and consumers.

Jenn Piepszak, chief financial officer at JPMorgan Chase, said in January that if the SLR relief was cut off this month the bank could also “shy away” from taking new deposits among other measures.

Some Republican lawmakers, who have sided with the banks, pressed Fed chairman Jay Powell for clarity on the rule during congressional hearings last week. Senator Mike Rounds of South Dakota urged Powell to keep an “open mind” when considering what he sees as “excessive and challenging capital requirements”.

Congresswoman Ann Wagner of Missouri also called for the exemption to be extended, flagging concerns that “arbitrarily” removing the exclusion could put “additional pressure” on the market for US government debt.

Warren and Brown accused banks of using the pandemic as an “excuse” to weaken the post-crisis regulatory reforms and instead urged them to boost capital levels by pulling back on dividends and buybacks.

“It is inexcusable to provide Wall Street with deregulatory capital exemptions while allowing them to pay out tens of billions in capital every quarter,” they wrote.

Powell said last week the US central bank had yet to make a decision on the SLR.

With regards to the letter from Warren and Brown, a Fed spokesperson said: “We have received the letter and plan to respond.”

The FDIC and OCC did not immediately respond to a request for comment.

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