Full report here.
Unlike in the 2008 financial crisis, the Coronavirus crisis does not so far appear to have threatened the solvency of major banking institutions. While it’s true that the largest banks currently look solvent in the face of economic stress, this is in significant part because they have benefited greatly from regulatory forbearance and from Federal Reserve intervention in financial markets. This important part of the story has been frequently overlooked or played down. Further, their continuing solvency over an extended recession is considerably more doubtful than is currently acknowledged — and much more dependent on continued help from the government.
This report, based on analysis of regulations and bank financial reports by Americans for Financial Education Fund and Risky Finance, lays out some of the clearest ways in which the nation’s six largest banks have benefited from regulatory forbearance and the Federal Reserve’s financial market interventions. Key conclusions include:
- During the second quarter of 2020, major banks were permitted to remove almost $2 trillion from their balance sheets for the purposes of calculating compliance with key leverage capital thresholds.
- Banks also benefited from $20 billion in direct capital relief due to a two- year moratorium on counting new loan loss reserves against their retained earnings for capital purposes. This impact is moderate currently but will increase in significance if there is in an extended recession.
- The revival of bond and equity markets thanks to Federal Reserve assistance have also driven tens of billions in additional trading and investment banking profits at the nation’s largest banks. These profits, which are so large that they seem clearly connected to the extraordinary levels of public support from the Fed for trading markets, also function to boost big bank solvency.
- When these factors are taken into account, the nation’s six largest banks are already much closer to statutory leverage limits than is generally acknowledged. For example, if not for supernormal trading profits and regulatory exemptions, Citibank would have had a supplementary leverage ratio of 5.3% as of June, 2020, just 30 basis points above the legal limit of 5%, as opposed to the 6.7% it reported.