FOR IMMEDIATE RELEASE
Aug. 11, 2020
Senate Pandemic Relief Bill Would Weaken Key Safeguard Against Financial Crisis
Pandemic relief legislation proposed by Senate Republicans would loosen a critical, decade-old safeguard against a new Wall Street-driven financial crisis at a time when the United States is facing an unprecedented economic contraction.
A provision inserted by Sen. Mike Crapo, chairman of the Senate Banking Committee, would encourage Trump-appointed regulators, who have already sought to reduce the minimum amounts of their own risk capital that banks have to hold during the COVID-19 pandemic, to go further.
“The likely outcome of this provision would be financial disruption or a bank bailout as the pandemic-induced recession continues and deepens,” said Marcus Stanley, policy director at Americans for Financial Reform. “Overall, its impact would be to enrich bank senior executives and large shareholders at the expense of financial stability, which we know from the 2008 crisis matters to all of us.”
Congress passed a rule, known as the Collins Amendment, as part of the 2010 reform of the financial system, that required regulators to set a minimum floor for capital held by large, complex banking institutions. Lawmakers resonated that these big banks should be subject to requirements at least as strict as ordinary depository banks. Equity capital — the money put at risk by purchasing shares — can absorb losses in ways that debt cannot. However, banks often seek to minimize their equity capital base, since less equity permits and higher share prices, which make for bigger bonuses.
The Crapo proposal has generated dissent among Republicans. Sen. Susan Collins, sponsor of the original provision in 2010, has already filed an amendment that would strike the part of Republican bill that would make this change. The Senate should follow her lead and preserve minimum statutory thresholds for bank capital.
The Crapo proposal comes after Trump appointees at the Federal Reserve have already engaged in multiple actions to allow banks to hold less capital and pay out more of the capital they do have to their shareholders during the pandemic-driven economic turbulence. The Fed has suspended requirements for banks to hold capital against their balance sheet holdings of U.S. Treasuries and central bank deposits, and banking regulators exempted banks from capital holdings associated with loan loss reserves. Even as they did this, the Federal Reserve also permitted banks to pay out their capital reserves in dividends, money that could have gone toward making banks unstable at a time of great economic uncertainty, thus transferring resources that could have protected the public against another bank bailout to wealthy bank shareholders and executives.
With the new proposal by Crapo, banks and their allies in Congress and the Trump administration are now calling on Congress to loosen the protections written into the 2010 Dodd-Frank law. This provision of the Republican pandemic relief bill would give regulators discretion to override the Collins Amendment, allowing them to lower leverage capital thresholds for the nation’s largest banks below the generally applicable minimum bank capital requirements.
Given all the direct and indirect assistance already offered to big banks by regulators during this crisis, there can be little doubt that they would do exactly that. The excuse for taking this step is that requirements for banks to keep a strong capital base lessens the capacity of banks to expand their balance sheet to do pandemic-related lending.
“The better way to ensure banks can lend effectively through a long recession is to require them to preserve and enhance their existing capital base,” Stanley said. “The Fed should be restricting bank dividends, and also encourage banks to raise additional capital in the current extremely robust stock market, not doing favors for Wall Street executives under the guise of pandemic relief.”