Stories Driving the Week
The Importance of Moving to the Stress Capital Buffer
The Federal Reserve finalized the stress capital buffer framework in March 2020, just days before the worst of the COVID-19 shock ignited global financial turbulence and economic uncertainty. Implementation of the SCB was delayed before it took effect in October and that delay remains in place. However, a new BPI blog post argues that it is now time to move forward with implementation.
The SCB enables capital requirements to be more dynamic because it integrates both the results of stress tests with banks’ point-in-time capital requirements. While banks weathered one of the worst crises in modern history through 2020 and demonstrated their ability to withstand a severe economic shock, ongoing uncertainty and concerns over a second COVID-19 wave influenced the Fed’s decision to delay the implementation of the SCB. Now that conditions are improving and the veil of uncertainty is lifting, any further delay could undermine the credibility of the new framework by sending a message to market participants that banks require more capital than is demonstrated under the framework. This would effectively raise capital requirements, tighten credit availability, and would generate uncertainty among shareholders that results in a permanent increase in banks’ cost of capital.
SLR Exclusion for Treasuries, Reserves to Expire, But Potential Long-Term Changes on the Horizon
Exclusions to the supplementary leverage ratio for Treasuries and reserve balances will expire at the end of March as scheduled, but the central bank will soon consider modifications to the measure, the Federal Reserve announced March 19. The supplementary leverage ratio is a measure of capital compared to total on-balance-sheet and off-balance-sheet assets that treats all assets the same regardless of risk level, even if they are basically risk-free. Treasuries and reserve balances – banks’ deposits at the Fed – were excluded from the supplementary leverage ratio at the beginning of the pandemic to give banks room on their balance sheets to support more lending to businesses and households.
“The episode represents a slow-moving clash between the Fed’s ability to conduct monetary policy and its regulations that are intended to keep banks prepared for economic shocks,” said a POLITICO article this week. “That’s because the central bank doesn’t want banks’ books to get clogged up with deposits such that they have less room to facilitate trades in, say, the Treasury market.”
The banking agencies issued a separate press release that simply announced the expiration of the SLR exclusions as scheduled on March 31, 2021 and noting that the “temporary change was made to provide flexibility for depository institutions to provide credit to households and businesses in light of the COVID-19 event.” In a companion release, the Fed acknowledged the surge in reserves and government bond issuance, saying it “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 central bank will soon invite public comment on potential SLR modifications to ensure the SLR “remains effective in an environment of higher reserves,” it said. The Federal Reserve also noted that the proposal and comments will contribute to ongoing discussions with the Department of the Treasury and other regulators on future work to ensure the resiliency of the Treasury market.
Bank On and CRA: A Powerful Yet Simple Change That Can Increase Financial Inclusion
Banks are striving to expand financial system access by offering low-cost accounts under the Bank On program to unbanked and underbanked Americans. A clear mandate from federal banking regulators on how banks receive credit for these accounts under the Community Reinvestment Act would serve as a strong incentive for even more banks to offer these accounts, a new BPI blog says. The federal banking agencies can provide such clarity by including in any final CRA regulation a clear treatment of these accounts, and issuing interim guidance pending issuance of such a rule. Those actions would improve financial inclusion and help more underserved consumers access services, establish credit and build wealth.
BPI Welcomes Dialogue on Climate-related Risks Amid Senate Banking Committee Hearing
BPI and its member banks welcome engagement with policymakers as banks support their customers in transition, BPI said in a statement in light of the Senate Committee on Banking, Housing and Urban Affairs hearing March 18 on climate change risks and the financial system.
Eight BPI member banks have committed to net-zero greenhouse gas emissions in alignment with the Paris Agreement, and other BPI members are contributing through the Rocky Mountain Institute Center for Climate-Aligned Finance, the UNEP Finance Initiative, the Taskforce for Climate-related Financial Disclosures and the Partnership for Carbon Accounting Financials, among others.
Banks know what’s necessary to support clients in the transition to a low carbon economy and unlock the trillions of dollars of financing that will be needed – consistent language, reliable data and policies that support capital allocation to transition activities and do not hinder them. Climate policy should take account of the need to support businesses as they seek to move from ‘brown’ to olive, to ultimately, green, and recognize the role of banks in facilitating the flow of capital to these companies and infrastructure investments.
As a result, certain policy tools that could artificially alter capital allocation away from much needed transition financing, such as climate stress-testing for capital adequacy, should be avoided. Not only are such exercises based on long time horizons and highly variable data, but arguably they could push the very risks they are seeking to identify outside of the regulated sphere and do not encourage banks to work with clients as they transition their business models. To address the real consequences of a warming planet and a changing global economy, it will be key for climate risk evaluation to stay rooted in reality.
Fed Policy Path Continues on Same Course, With Brighter Growth Forecast
The Federal Reserve left its plans for interest rates and asset purchases unchanged, Chair Jay Powell said at a press conference after the FOMC meeting March 16-17. The central bank revised its economic growth forecasts upward since December in light of more widespread COVID vaccinations and fiscal stimulus. Powell said any temporary price rises during the pandemic recovery would likely have only fleeting effects on inflation.
He also said the “regulated part of the financial system held up very well” in the pandemic crisis. Banks have served as a source of strength for the financial system even in market turmoil last year.
Powell also said the central bank is a “couple weeks away” from announcing a decision on whether to extend the current restrictions on bank dividends and buybacks into the second quarter. He said the Fed will continue a “data-driven approach,” and pointed out that banks performed well on the December stress tests. The 2021 stress test results will be released before the end of June. Large banks have already demonstrated resilience in two rounds of stress tests last year, and banks showed yet again they can weather extreme stress scenarios, which would further bolster the case for resuming capital distributions.
House Votes to Extend PPP by 2 Months
The House on March 16 voted 415-3 to delay the Paycheck Protection Program deadline by two months, extending it to May 31. The legislation, aimed at ensuring small businesses and their employees get a chance to access crucial pandemic relief funds before the program lapses, would also provide an extra month after that for the SBA to process loan applications. Senate Majority Leader Chuck Schumer (D-NY) filed cloture on the bill, a procedural move that tees the bill up for Senate consideration, which is expected next week. “Based on recent economic data and the demand for PPP loans, it’s clear that small businesses still need support,” House Small Business Committee Chair Nydia Velazquez, a cosponsor of the bipartisan bill, said in a statement urging swift Senate passage.
In Case You Missed It
Senate Republicans Urge Caution on Fed Climate Modeling
Senate GOP lawmakers led by Banking Committee Ranking Member Pat Toomey (R-PA) encouraged the Fed in a letter this week to avoid using financial regulation and supervision to set broader climate change policy. “That would be beyond the scope of the Federal Reserve’s mission,” the lawmakers wrote in a March 18 letter to Fed Chair Jay Powell. “We urge you to refrain from taking any additional actions with respect to climate-related risks that would impose certain costs for uncertain benefits.”
The letter comes as the Fed recently joined the Network for Greening the Financial System, an international group of central bankers focused on climate issues, and as financial regulators consider how climate risks affect the financial system. The senators cautioned against analyzing banks’ climate risk exposure based on unreliable data projections and said banks are best equipped to manage climate-related risks in their portfolios.
BofA Chief Moynihan Says Bank is Prepared to Compete with Walmart Venture, Other FinTechs
Bank of America CEO Brian Moynihan said in a Bloomberg interview this week that the bank is ready to compete with Walmart’s new FinTech venture and any other tech competitors. “I respect every competitor, I don’t fear any competitor,” Moynihan said March 15. “We study all competitor moves, whether it’s the FinTech disruptors or major players.”
Truist Becomes First U.S. Regional Bank to Issue ‘Social Bond’
Truist Financial joined the ESG push this month by issuing its first social bond, which raised $1.25 billion to invest in affordable housing and essential nonprofit services for underserved communities, according to an American Banker article. It is the first bond of this kind to be issued by a U.S. regional bank.
Biden Hires Sperling to Oversee Stimulus Implementation
President Joe Biden has tapped former Obama- and Clinton-era economic adviser Gene Sperling to oversee the implementation of the $1.9 trillion pandemic relief stimulus package, according to Bloomberg this week. Sperling will work with Administration leaders and state and local governments to quickly distribute federal dollars.
SBA Nominee Guzman Gains Senate Confirmation
The Senate on March 16 confirmed Isabel Guzman to lead the Small Business Administration. Guzman, a former Obama Administration official who has led the California Office of the Small Business Advocate since 2019, will take the helm as the agency oversees the end of the Paycheck Protection Program for small-business pandemic relief loans and other COVID-19 aid initiatives. Approximately $703 billion has been given out under the PPP since its inception last year, according to SBA data through March 14, although the SBA has grappled with technical and other issues in rolling out loans. Guzman was confirmed in an 81-17 bipartisan vote.
Bloomberg: These 10 Black Bankers are Reshaping Wall Street
Bloomberg profiled 10 Black banking industry executives in a March 16 piece, highlighting their careers as the industry aims to increase diversity and inclusion. The executives include Citigroup’s Harold Butler, Wells Fargo’s Kristy Fercho, JPMorgan’s Keith Canton and Goldman Sachs’ Nicole Pullen Ross.
Powell Nods to Central Bank Digital Currency Research, FedNow in Payments Conference Speech
The Federal Reserve is working on ways to make payments faster and more efficient, Fed Chair Jay Powell said in remarks on March 18 at a conference hosted by the Committee on Payments and Market Infrastructures in Basel. Powell cited the FedNow payment system set to be introduced sometime in 2023 and reiterated that the Fed is tinkering with the idea of a central bank digital currency. He highlighted the need for a CBDC to coexist with cash and other types of money, a principle included in a recent report from the Bank of International Settlements and a group of central banks that analyzed how CBDCs could help central banks fulfill public policy goals.
BPI Blog: How an Economist Enjoys the NCAA Tournament
March Madness is upon us and, if you’re like us, you’re grasping for any competitive advantage to craft the perfect bracket.
Some turn to hallowed rituals, lucky tokens, or maybe even an octopus trained in the art of divination. But for our simple economists, those kept awake at night by the thought of taper tantrums, probability and statistics are their trade.
The truth is, we drafted this blog post more than two years ago. But the facts we are about to share with you are as true today as they were then. If you were looking for a sign, this is it.