Bank Capital Rule as a Political Football

The Story:

Jerome Powell, a President Obama appointee to the Federal Reserve, who was later elevated to its chair by President Trump, has become the central figure in a political fight over banking regulations (one of the functions of the Fed). The rule in question is called the “supplementary leverage ratio,” (SLR) the ratio of a bank’s capital (its common stock and retained earnings) to its assets.

Background:

The SLR is a safeguard for the banking system that was introduced after the global financial crisis of 2008. It was relaxed in 2020, though, as an emergency measure in response to the Covid-19 pandemic and the pressure that was placing on business. The relaxation exempts certain holdings from the calculation of the ratio. Since it lowers the denominator of the ratio it becomes possible for the banks to lower the numerator as well — they don’t have to hang on to so much of their retained earnings as a cushion against crisis.

The issue is now whether the pandemic relief will be allowed to expire and the old SLR rule will be applied again in its full force when the relief is due to expire at the end of March.

The Thing to Know:

The Federal Reserve is an autonomous agency, designed to be independent of blatant political pressure from the elective branches of government. That is why, for example, the Governors have staggered fourteen-year terms. Nonetheless, pressure exists and Powell is surely feeling it.

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