Powell: Relief from Congress in bank leverage ratio should be ‘explicitly temporary’

Any relief banks may receive on their leverage ratio requirements through congressional action should only be temporary, the chair of the nation’s central bank said Wednesday – but he did indicate support for the provisional respite.

In a press conference following a meeting of the Federal Reserve’s rate-setting committee, Chair Jerome H. (“Jay”) Powell said banks were serving as a “source of strength” for the U.S. economy but indicated that giving the financial institutions some leeway in their capital requirements could help them stay that way.

“If Congress chooses to do this, we would want it to be explicitly temporary,” Powell said. “In other words, this will not be a permanent change in capital standards. We haven’t decided to do it but it would give us the ability to allow banks to grow their balance sheet and in doing so to serve their customers better.” He referred to provisions in a Senate bill championed by Republicans to shore up the economy.

Powell noted that the Fed has already given banks some temporary leeway in their leverage ratios, specifically by removing Treasury securities (and deposits in Federal Reserve Banks) from the calculation of banks’ supplementary leverage ratio.

He also pointed to central banks around the globe that have taken similar action in their countries, citing the Swiss National Bank, the Bank of Japan, the European Commission, and the Bank of Canada. He said the action is “allowing (banks) to grow their balance sheet in a way that serves their customers. That’s really what it’s doing.”

However, he reiterated that “I would want it to be explicitly temporary if we do do it.”

In other comments during the press conference following the meeting of the Fed’s rate-setting Federal Open Market Committee (FOMC), Powell said:

  • The rising number of COVID-19 infections since the middle of last month are beginning to drag the economy, although he would not forecast how large or sustained an impact that would be.
  • Key indicators are showing economic activity slowing. He pointed to decline in debit and credit card use, slower job growth in small businesses, and hotel occupancy rates flattening out – as well as reduced business at restaurants, gas stations and beauty salons – all as signs of consumers pulling back.