The largest banks in the US have been granted temporary additional lending capacity by US regulators.
In a joint statement on Friday evening, the Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office for the Comptroller of the Currency (OCC) announced “temporary modifications” to regulatory capital rules.
The change – which will expire on March 31, 2021 – temporarily excludes larger banks from having to report holdings of US Treasuries and deposits placed with the Federal Reserve in their leverage ratios.
The rule, known as the ‘supplementary leverage ratio’, generally applies to banks with more than $250 billion in assets and requires them to hold a capital buffer of at least 3% of their total leverage exposure.
It was introduced in 2014 to raise liquidity requirements for global systemically important bank holding companies. There are more stringent requirements placed on the very largest companies.
“The temporary modifications will provide flexibility to certain depository institutions to expand their balance sheets in order to provide credit to households and businesses in light of the challenges arising from the coronavirus response,” the financial authorities’ joint statement said.
Any banks taking advantage of this temporary change must seek regulatory permission before making “certain capital distributions”, the regulators’ notice stated.
Holding assets – in particular deposits – at a Federal Reserve Bank was “essential to market functioning”, the regulators said, and especially during periods of market stress or financial uncertainty.
The COVID-19 pandemic and the subsequent economic stimulus measures introduced by the Fed have led to its balance sheet expanding, and this was expected to continue in the near term, the central bank said.
Businesses and households have also drawn down credit lines and deposited cash with banks, “further increasing the size of depository institutions’ balance sheets”, the notice said.
“Absent any adjustments to the supplementary leverage ratio, the resulting increase in the size of depository institutions’ balance sheets may cause a sudden and significant increase in the regulatory capital needed to meet a depository institution’s leverage ratio requirement,” the regulators added.
This could have an adverse effect on companies that played a vital role as financial intermediaries and custodians, they added.
The rule change will take effect when it is published in the Federal Register.
The Fed has also warned that high levels of household and business debt before the pandemic could result in pressure on lenders’ balance sheets. Banks have already started to raise loss forecasts in anticipation of a difficult period for borrowers.