Two key bank regulators are holding off on easing Wall Street debt limits in response to the coronavirus pandemic, leaving billions of dollars locked up at banking subsidiaries that could be used for lending amid the deepening economic crisis.
For now, the Federal Reserve is the only U.S. banking watchdog that's relaxed a landmark leverage rule that stipulates how much capital banks must hold against their assets. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., which also enforce the rule, have privately indicated they aren't yet ready to follow its lead, said three people familiar with the matter.
The Fed said its relief, which was granted April 1 and lasts for a year, will allow banks to extend more credit to struggling households and businesses. But the Fed is also taking a risk because its decision threatens to make the industry less safe in the midst of a meltdown by reducing the capital buffers that lenders must maintain to survive financial shocks.
It's significant for Wall Street that the OCC and FDIC are holding the line because the Fed's authority is limited to bank holding companies. So JPMorgan Chase's capital demands are now lower with the Fed saying that banks no longer have to hold cushions against Treasuries and cash reserves. Yet capital requirements for Chase Bank, a JPMorgan unit, remain the same because it's primarily regulated by the OCC.
Billions captive
In the absence of unified action from the regulators, tens of billion of dollars could remain captive in Wall Street banking subsidiaries, rather than being lent out. Talks are continuing among the federal agencies, and the OCC and FDIC may ultimately come on board, said the people who asked not to be identified because the discussions are private.
Spokespeople for the FDIC, OCC and Fed declined to comment.
The rule the Fed dialed back — the so-called leverage ratio — is one of the most fundamental limits implemented in response to the 2008 financial crisis. It's meant to be a very simple calculation of each bank's capital against all its assets.
When the Fed announced the change last week, Wall Street noticed the OCC and FDIC's absence. Questions raced around the banking industry: Where are the other agencies on this? What will they do?
"It will raise a lot of questions if days pass without any word from the other regulators," said Ian Katz, an analyst with Capital Alpha Partners in Washington.
Dimon's warning
The OCC oversees national banks, so it would need to match the Fed's action in order for the change to extend to lenders' subsidiaries, such as Chase Bank or Citigroup Inc.'s Citibank. The commercial and consumer banking arms are generally the companies' biggest components. They are also the ones backed by the federal government, including through insurance of customer deposits.
JPMorgan Chief Executive Jamie Dimon, a frequent critic of rules, griped Monday that regulations could curtail lending amid the coronavirus slowdown even though his bank has an "extraordinary amount of capital and liquidity we could deploy."
"Some rules can improperly prevent healthy, well-capitalized banks from lending freely in times of stress," Dimon wrote in his annual letter to shareholders. "Leaving high-quality, available liquidity undeployed in times of need is an opportunity forever lost."
By itself, the Fed's easing of the leverage ratio is still meaningful, especially for Wall Street firms with large non-bank operations. The move is one of several rule changes the Fed has made to encourage lending since the coronavirus outbreak.
Fed's caution
For its part, the Fed cautioned banks against using the additional flexibility to return more cash to shareholders, such as through dividends.
Karen Petrou, a managing partner at Federal Financial Analytics, said she was surprised at the lack of statements from the OCC and FDIC. Still, she argued the Fed is probably the most important regulator in this case, because it's "the deciding factor in capital distributions, which are only a holding company matter."
The Fed's decision granted the banking giants 12 months of freedom from the part of the leverage ratio calculation that demands they maintain capital against relatively risk-free assets pouring in from clients.
It's unusual, but not unprecedented, for banking agencies to move on their own, with the Fed having recently boycotted a multiagency proposal to overhaul the Community Reinvestment Act, and the Fed and OCC pushing a separate proposal on overhauling the leverage ratio rule in 2018 without the FDIC.
