“Congress wrote this provision to ensure that, even under lax banking regulators, banks could absorb losses In the event of a downturn,” the senators wrote to Mr. Quarles In a letter on Thursday. “Republican legislation now being crafted reportedly contains a broad deregulatory measure that will accomplish the giant giveaway that banks have long sought.”
In a separate letter to Mr. Powell, the senators offered praise for his commitment to the Fed’s independence, but added: “Vice Chair Quarles has not been shy about lobbying on behalf of Wall Street, and it concerns us to learn that Vice Chair Quarles and Federal Reserve staff have been working with Senate Republicans to craft legislation that would undermine financial protections Congress passed after the last financial crisis.”
A Fed spokesman confirmed that the central bank had received the letters.
The Fed has used its existing authority to tweak big banks’ capital rules In response to their claims that the rules are keeping them from doing a wide range of business for their customers right now. In March, for instance, officials reassured the biggest banks that they could continue handing out cash to shareholders — to keep financial markets calm — even if it meant dipping into the capital reserves they were supposed to hold for times of crisis. With the change, the penalty that would normally be placed on them for accessing those reserves would be imposed more gradually. In April, the Fed temporarily loosened another capital requirement for big banks, the supplementary leverage ratio.
The change that Fed officials want Congress to make is the similar to the one they made to the supplementary leverage ratio. Under the current rules, banks must count all assets — including relatively safe ones like customer deposits that banks choose to park at the Federal Reserve and In Treasury securities — when calculating the level of capital they must hold against the overall amount of those assets. That helps constrain risk-taking by ensuring banks have enough capital on hand In the event of a severe downturn, when even the safest assets may carry unanticipated risks.
Banks say that treatment is the too severe; that U.S. government bonds are not as risky as, say, credit card loans. But backers of the leverage ratio say there are times when even otherwise safe assets can be risky for banks to own.