Warren Says Big Banks Shouldn’t Get Capital-Relief Extension

Senators Elizabeth Warren and Sherrod Brown urged U.S. regulators to reject lenders’ appeals to extend an easing of capital requirements that has allowed banks including JPMorgan Chase & Co. and Citigroup Inc. to stretch themselves another $1 trillion during the pandemic.

The Democrats contend the industry appears to be taking advantage of the coronavirus crisis to “weaken one of the most important post-crisis regulatory reforms,” they wrote in a joint letter to the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency. Warren of Massachusetts and Ohio’s Brown, who took over the Senate Banking Committee this year, said granting the extension would be a “grave error.”

At stake is a temporary measure set to expire March 31, which cut the capital demand on big banks by an estimated $55 billion and allowed more than $1 trillion in additional activity, letting them take on the flood of deposits and Treasuries that were a side effect of pandemic stress and government rescue policies. To achieve that effect, the regulators moved in April to loosen a key limit on how leveraged the banks can get, enabled banks to hold more no-risk securities such as Treasuries without having to add the assets to calculations of how indebted they are.

A year later, that move to shore up the turbulent Treasuries markets and keep lenders extending credit is being drawn as a political battle line. The shot from Brown and Warren follows Republican lawmakers’ repeated encouragement during Fed Chairman Jerome Powell’s congressional testimony last week that the Fed do the banks’ bidding. He declined to say whether his agency favored the current expiration date, saying the Fed is still considering it.

“Banks have taken very large reserves against losses and so have proven themselves pretty resilient,” Powell said to Brown during the Feb. 23 Senate hearing, citing intervention to limit bank dividend growth and share buybacks. “And the result, what you see now, is a banking system that has higher capital than it did going into the pandemic, and particularly for the largest banks.”

The biggest banks have lobbied urgently for a deadline extension while the pandemic’s economic headwinds continue, but Brown and Warren argue that if they need more of a safety cushion, the banks can find it by retaining some of the capital they’ve been returning to shareholders.

While much of the lobbying has targeted the Fed, which is still run by appointees of former President Donald Trump, the two other banking agencies were also involved in the original pandemic-relief effort. One of them, the FDIC, is also still led by a Trump regulator, Jelena McWilliams, but the OCC currently has an acting chief and is awaiting the nomination of a permanent leader. At any point, Treasury Secretary Janet Yellen has the authority to install whomever she likes at the agency as a fill-in comptroller.

The Democrats’ letter, dated Feb. 26 and released by Brown’s office Tuesday, was sent to Fed Chairman Jerome Powell, FDIC chief McWilliams and Blake Paulson, the acting comptroller of the currency.

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