New York (CNN Business)Federal regulators said Friday they won’t extend a Covid relief provision granted to big banks, dashing Wall Street’s hopes for an extension.
Last spring, when the economy and markets were in chaos, the Federal Reserve handed a sort of “get out of jail free” card to America’s big banks: It loosened leverage rules that JPMorgan Chase (JPM), Bank of America (BAC) and other large lenders must abide by.
But on Friday, US regulators said they would allow the leverage exemption to expire at the end of the month, explaining that the “temporary change was made to provide flexibility” to banks — allowing them to keep providing credit to families and businesses during the pandemic.
The decision follows pressure from leading Democrats who were worried big banks were using the pandemic as an excuse to weaken post-2008 crisis rules.
Some big banks such as JP Morgan and Citigroup (C) had been urging regulators to roll over the relief — if not make it permanent. Some Wall Street analysts warned that failure to extend the exemption could cause a destabilizing spike in bond yields if US banks decide to back away from the Treasury market.
Here’s how the exemption worked: Last spring the Federal Reserve, FDIC and Office of the Comptroller of the Currency had granted big banks a waiver allowing them to bulk up on ultra-safe US Treasuries and take in a surge of deposits without the usual penalty.
Those penalties are typically levied when banks flout rules around what’s known as the supplementary leverage ratio, or SLR. It requires the biggest US banks to hold capital of at least 5% of total assets on — and off — their balance sheets. It’s essentially a forced buffer, with the goal of preventing banks from becoming too leveraged.
But with the pandemic raging, the Fed announced on April 1 that it would temporarily exclude US treasuries and deposits held at Fed banks from the SLR calculation.
The moves were aimed at giving banks more lending firepower during the recession and ease strains emerging in the Treasury and repo markets.
Democratic Senators Elizabeth Warren and Sherrod Brown warned the Fed earlier this month it would be a “grave mistake” to extend what was supposed to be temporary relief.
Shares of big banks JPMorgan, Wells Fargo, Citi and Bank of America fell 2% or more apiece Friday morning, far outpacing the losses in the broader market.
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