WASHINGTON – A senior Federal Reserve official on Wednesday expressed disappointment at the extent to which banks have dipped into their capital and liquidity reserves to help strengthen the fragile US economy.
Fed Vice Chairman for Oversight Randal Quarles said that while “the banks have done a really good job” in response to the COVID-19 pandemic, he would have liked to see them benefit more from the pillows of capital built after the 2008 financial crisis to lend during a stressful time.
“All of these cushions besides the minimums are designed to be cushions, to be used during a time like this, and for the most part the banks haven’t,” he said during a virtual event organized by the Financial Times. .
Although Quarles noted that he “would have liked to see” more lending activity, he suggested that the lack of more aggressive action by financial institutions could be the result of regulatory incentives established by the Fed. rather than decisions of the institutions themselves.
“I think it’s more of a systemic problem than a banking problem,” he said.
The Fed, as well as the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, issued a joint statement in March, encouraging financial institutions to use their capital and cash reserves to help those recovering from the pandemic, noting that the buffers were designed for banks to support the economy during a downturn.
“One problem we’ve talked about globally, not just in the United States, is that in a situation like this, it would be good to see the banks use the capital and liquidity buffers that have been built into the regulatory system. be used at a time like this, ”Quarles said.
But he added that this “may be our problem as much as their problem.”
“We’re looking internally within the regulatory system to say, what barriers have we created in the regulatory system to the use of these tampons that we can maybe adjust so that the tampons become bigger. usable in a stressful time like this? ”he said.
Still, Quarles praised banks for setting aside loan loss reserves and extending credit as markets froze in March and April.
The public will get more information on banks’ capital and liquidity levels before the end of the year. The Fed holds its very first mid-cycle stress test using bank data from the start of the year to examine the performance of the capital levels of the nation’s largest banks under potential economic stress scenarios.
The Fed’s stress tests at the start of the year showed that the 34 banks examined would maintain required levels of capital in several hypothetical economic models of post-pandemic recovery, but that several would have exceeded minimum levels in the worst case scenario. severe.