No fan mail: Letter from Minneapolis Fed assails central bank plan to relax liquidity-related rules for big banks

Calling it a “threat to financial stability,” the Federal Reserve Bank of Minneapolis said in a comment letter that it opposes the Federal Reserve Board’s proposal to relax liquidity-related regulations for large banks.

The letter from the Minneapolis FRB (sent Nov. 19 and unsigned) termed the Fed proposal “to weaken regulations on banks particularly alarming.” The Fed issued the proposal Oct. 31 to ease enhanced prudential standards and tailor capital and liquidity rules to large banks’ risk profiles on a 3-1 vote.

“Primarily, it extends a movement to roll back regulations that were put in place after the Great Recession,” the two-page Minneapolis FRB letter states. “History suggests that while not desirable, this is to be expected. What is most alarming is that this is not a future generation forgetting mistakes of their parents or grandparents. It is the same generation that made the terrible mistakes in the first place that is already forgetting and now is following the same path again. If our own memories are so short that we have already forgotten the lessons from just a few years ago, what hope do future generations have to avoid making these same costly mistakes?”

Specifically, the letter states, the bank is concerned about the unnecessary relaxation of liquidity-related regulations for large banks. The letter says the bank agrees with the Fed governor casting the lone vote against the proposal. “Governor Lael Brainard highlights the issues that concern us in her statement, and we agree with her analysis and share her view that the proposed changes should not move forward,” the letter states. “

The letter also chides the Fed board of governors for purportedly ignoring “recent evidence — some of which economists from the Board of Governors itself has produced” that equity funding rules for large banks are too low, not too high.

“Even measures of the credit cycle and financial stability risk indicate that it is likely prudent for banks to continue to build capital,” the letter states. “The Board of Governors has the power to maintain the current regulatory regime for large banks and strengthen it where needed. Now is not the time to abdicate that power and put taxpayers at greater risk of future bailouts.”

In a press release issued with the letter, the Minneapolis Fed said it has warned before about banks that are too big to fail and that might trigger public bailouts. “In 2017, the Minneapolis Fed produced The Minneapolis Plan to End Too Big to Fail, which is a policy solution to enable the U.S. economy to flourish without exposing it to large risks of financial crises and without requiring taxpayer bailouts.” The bank said that plan followed an earlier warning from the Minneapolis Fed in 2003.

Comment on RIN 7100-AF20, Prudential Standards for Large Bank Holding Companies and Loan Holding Companies

The Minneapolis Plan to End Too Big to Fail