19 March 2021

Probably a Good Idea, Not Sure If It Is the Right Time

The Federal Reserve is looking to reverse its pandemic driven loosening of capital requirements for banks

I am generally in favor of higher capital requirements for banks, because when the requirements are lowered, fraud, incompetence, and collapse invariably follow.

On the other hand, I'm not sure if now is the best time for this:

The Federal Reserve has announced that it will let looser capital rules for banks introduced at the start of the pandemic expire at the end of March.

The US central bank’s decision could disappoint banks, which had been pushing for an extension of the capital relief.

Capital rules were eased last year in a temporary change to the supplementary leverage ratio (SLR), and have been the focus of an intense political battle in recent weeks.

While Democrats in Congress had argued that the relief from capital rules should be terminated at the end of this month, many Republicans sided with the banks to argue for an extension.

The Fed said on Friday that the change to the SLR would expire as scheduled on March 31. However, the central bank said it would explore a more permanent overhaul to the rules.


The SLR requires large banks to have capital equal to at least 3 per cent of their assets, or 5 per cent for the largest systemically important institutions. Under the April 2020 rule change, lenders were allowed to temporarily exclude holdings of US Treasuries and cash kept in reserve at the central bank from their assets when calculating the ratio.


Bank executives have warned that the reimposition of these capital requirements could hamper their ability to extend credit to companies and consumers, and in some cases force them to turn away deposits.

If you cannot justify a loan with a return to (already dangerously lax) existing capital requirements, you should not have made the loan in the first place.

If you are making those loans, then when (not if) you need a bailout, the taxpayers will be on the hook


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