Fed won’t renew a pandemic concession for banks, suggesting their free ride is over

The Federal Reserve will not maintain a change it made in April 2020 that eased banks’ leverage requirements, per The New York Times. As of 2013, large banks (those with more than $250 billion in assets, per Reuters) must hold capital equal to 3% of their total assets to protect against losses. But in 2020, the Fed tweaked the rule to allow banks room to expand their loan books and spur more lending to customers amid the pandemic’s economic fallout. Under the change, Treasuries and cash reserves held at the Fed were excluded from banks' leverage calculations until March 31, 2021. The regulator has now declined to extend these exemptions, though it did leave the door open to future tweaks around leverage ratio calculations.

Retiring the leverage concession could make banks less eager to lend—and be premature given the precarious nature of the US' fight against the pandemic. With US coronavirus cases declining from their January high, a stimulus package dispensing aid to consumers, and vaccinations climbing, the Fed may feel that now is the time to reinforce pre-pandemic levels of accountability among banks. However, if case counts surge again due to new strains of the virus and states have to lock down again, the Fed may have to walk back its decision to stimulate more relief lending.

The Fed’s move may portend the end of a period in which banks enjoyed concessions in exchange for working with the government to mitigate the pandemic’s economic effects. Unlike during the 2008–2009 financial crisis—when banks on a long regulatory leash were a big part of the problem—the Fed has looked to financial institutions (FIs) as partners in helping US consumers weather the pandemic. FIs were in position to reap significant goodwill from regulators in exchange for taking actions like disbursing stimulus payments, handling loans through the Paycheck Protection Program, and offering relief to customers like loan forbearance. For example, Wells Fargo got a temporary pause on the asset cap imposed on it by the Fed in 2018. But by allowing the leverage rule change to expire, the Fed appears to be returning to its pre-pandemic regulatory stance, under which it will hold banks to stricter standards.