Senate efforts to slip in lower leverage requirements brushed off by small, large banks

Lawmakers are jostling over whether or not to slip in a legislative change that would give bank regulators the power to temporarily lower bank capital requirements amid COVID-19. Yahoo Finance’s Zack Guzman and Brian Cheung discuss.

Video Transcript

ZACK GUZMAN: As we have been tracking the way that Washington continues to respond to this pandemic at hand, a shot in the arm here has been the idea of lowering leverage requirements at banks to maybe open up lending and support here for the economy. But banks aren't necessarily excited about that or not, at least, as excited as you might think. And here to discuss that with us is Yahoo Finance's Brian Cheung, who has the details. And Brian, I mean, it seems like they would be more excited about this.

BRIAN CHEUNG: Well, Zack, as we talked about, that coronavirus relief bill that seems to be sputtering on Capitol Hill-- we've heard about unemployment insurance. We've heard about help to state and local governments. But how about a little bit of looser bank regulation? That's the proposal from Mike Crapo, the lead Republican on the Senate banking committee. Here's how it works.

So regulators probably look at leverage in a bank buy totaling all their non-liabilities, what they call capital, and then dividing it by their total size. They call that the leverage ratio. But there's a growing call to ease the way that the Fed and regulators approach that ratio, because the concern is that maybe banks need to be more levered right now to lend to this economy that really needs the help right now.

Large banks, for what it's worth, have already gotten some form of help through a Fed change that they enacted back in April. So JPMorgan Chase, Citigroup, Wells Fargo, and Bank of America faced what they call a supplementary leverage ratio. And all of those ratios have gone down in the second quarter, as a result of that help.

But as you mentioned, Zack, banks not necessarily saying they need this help. You had JPMorgan Chase's Jamie Dimon saying on an earnings call a few weeks ago that we're not going to rely on that temporary relief as we let into the economy. So a lot of concern about what this proposal will actually do here.

Critics have said, whoa, this might not be a good idea, because it invites banks to get a little riskier here. We've had Sheila Bair, the former head of the FDIC, saying that she would advocate for banks to simply stop paying out dividends, which is not the case right now as a way to preserve capital. The odds for this, for what's worth, Zack, are not that very high for them to include this into that final package. Keep in mind, we don't even know when we'll expect to see that package, but this is something that we've heard opposition to from the likes of fellow Senate Republicans like Susan Collins, in addition to the House Democrats, which, obviously, we need to pass any sort of package, if it were to ultimately end up reaching President Trump's desk.

ZACK GUZMAN: Yeah. And I mean, ultimately, it seems like it would be a bit of a boost in terms of the banks and the way that they would see this, but it's surprising to see them not so amped about maybe seeing a lower leverage ratio here. I wonder how much of that in your mind, do you think, might be tied to the idea of them just wanting less regulation on the idea of Congress jumping in here and changing things and whether or not that could come back to bite them later on?

BRIAN CHEUNG: Yeah. Well, in many cases, change is a little bit more expensive to effect for regulatory teams at these banks than it is for just the status quo. But we have to keep in mind that if there were to be a change, the legislative text that's proposed would be a merely temporary change. That's something that proponents of this have really emphasized, that this would only be for about 12 months or so.

But, again, you've heard opposition from the other side, saying, temporary or not, this might just be a way for banks to skirt having to raise new capital, which they say is really the safest way to project or protect yourself from any sort of economic shocks. But interesting to watch this nonetheless. Again, the odds of passage of this, not really so sure.