At first, banks leveraged the repo market to force the Fed to ease liquidity & capital rules; now they leverage the coronavirus. Whatever it takes.
By Wolf Richter for WOLF STREET.
The largest bank lobbying group in the US, the Bank Policy Institute, is now leveraging the coronavirus to pressure the Fed to relax nettlesome banking regulations imposed on banks after the Financial Crisis. These regulations, particularly the liquidity and capital requirements, were imposed on banks in order to avoid a replay of the Financial Crisis.
BPI’s lobbying piece, released yesterday – “Actions the Fed Could Take in Response to COVID-19” – was authored by three people, including BPI CEO Gregory Baer, who’d been Managing Director and General Counsel for Corporate and Regulatory Law at JP Morgan Chase from 2010 through 2015, and Deputy General Counsel for Corporate Law at Bank of America from 2006 through 2010. Both banks were massively tangled up in the Financial Crisis.
BPI’s bord is comprised of bank CEOs, including the CEOs of the four largest banks in the US: Jamie Dimon (CEO, JP Morgan), Brian Moynihan (CEO, Bank of America), Michael Corbat (CEO, Citigroup), and Charlie Scharf (CEO, Wells Fargo). And they can’t stand the limits that bank regulations impose on them.
This comes just months after the biggest banks, spearheaded by JP Morgan, blamed the nettlesome liquidity requirements imposed on banks after the Financial Crisis for the repo market blowout. Dimon admitted during the Q3 earnings call in October last year that JP Morgan could have lent to the repo market as repo rates were surging, and could have eased the problem, but refused to because of the liquidity requirements.
There have been allegations that the biggest banks purposefully refused to lend to the repo market in order to force the Fed to ease the liquidity regulations.
In its current attack, the BPI used the coronavirus outbreak as an explicit lever. Among several items that the BPI exhorted the Fed to change, were:
- Easing liquidity requirements to “encourage banks to deploy their liquid assets….”
- Easing capital requirements to “support the ability of banks to provide credit to the economy and be able to accommodate large amounts of deposit inflows in the event of a flight to safety.”
And today, Better Markets – a non-profit founded after the Financial Crisis “to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again” – launched a blistering counter-attack, with a statement, titled “Wall Street Biggest Banks Shamelessly Trying to Use Coronavirus to Get Federal Reserve to Weaken Rules”:
“It is shameless but not surprising, that Wall Street’s biggest banks would use the coronavirus to attack the financial rules they have been trying to weaken for a decade, including weakening critically important capital and liquidity requirements.
“It is even less surprising that they would direct their request to their favorite regulators at the Federal Reserve, which secretly doled out trillions of dollars bailing out Wall Street in 2008-2009 with virtually no public transparency, oversight or accountability. That was great for Wall Street’s biggest banks, but a disaster for Main Street and should not be repeated now.
“As the coronavirus-created uncertainty mounts and the possibly of financial deterioration increases, the worst thing anyone could do is reduce the biggest banks’ ability to withstand a downturn or shock, which is exactly what Wall Street’s biggest bank lobby group is arguing.
“Reducing capital and liquidity while preemptively taking action under Section 13(3) just tees up more taxpayer bailouts and makes them more likely.
Better Markets added that the best way to shore up bank capital and liquidity in times of stress isn’t to change regulations but to stop distributing capital and liquidity via dividend payments and share buybacks:
“Finally, to the extent Wall Street’s biggest banks are genuinely concerned about having enough capital and liquidity to support the real economy, then they should immediately stop making any additional distributions of capital via dividends or [share] buybacks until there is certainty regarding the threat posed by the coronavirus.
“If Wall Street’s biggest banks are unwilling to take that action immediately, then their real motives will be clear, and their deregulatory requests should be seen for what they are: part of their ongoing, years-long attack on the rules.”
That banks would explicitly leverage the coronavirus – after having already leveraged the repo market – to force the Fed by hook or crook to loosen capital and liquidity requirements adds another wrinkle to what’s going on here.
When and how will the reaction by consumers to the coronavirus – dollars spent or not spent – become visible in the overall economic data? That’s the question going forward. In January, consumers were still in hunky-dory land. Read... Has the Coronavirus Hit US Consumer Spending Yet?
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.