Regulators To Ease Big Bank Rules Amid Coronavirus Mayhem?

The coronavirus pandemic has been wreaking havoc on global markets, including the United States. Concerns over the crippling COVID-19 impact on the U.S. economy are keeping investors on their toes.

Banks, including Bank of America (NYSE:BAC) , JPMorgan (NYSE:JPM) , Morgan Stanley (NYSE:MS) , Goldman (NYSE:GS) , PNC Financial (NYSE:C) , Wells Fargo (NYSE:C) and Citigroup (NYSE:C) , are diving down with the massive sell-off following the Federal Reserve’s announcement of emergency measures and buyback suspensions by major banks. Heightening concerns over the sector’s earnings outlook have jeopardized the market. Curtailment of businesses and consumer activities, in an effort to paralyse the spread of the pandemic, has sparked fears of another recession in the United States and worldwide.

Amid various measures to combat coronavirus’ impact on the economy, Federal regulators are in discussions to ease out liquidity rules on banks, along with increasing the leverage the companies can hold to reduce the financial pressure stalking from the coronavirus pandemic.

Notably, the post-financial crisis framework provided for “counter cyclical capital buffer” or CCyB, which required banks to hold extra buffers above the supplemental capital requirements as per the rules. Nonetheless, though the Fed is not in favor of invoking the CCyB, in the past few years, banks, on average, have paid shareholders above their earnings depleting capital levels.

Moreover, the Office of the Comptroller of the Currency might ease rules for leveraged lending initiated in 2013, though nothing conclusive has been disclosed yet. Also, the proposed rule over supplemental leverage ratio standards and the Current Expected Credit Loss standard implementation date might be relaxed by the OCC.

The CECL accounting standard guides loan-risk measurements and limits risky loans provided by banks. The standard came into effect this year for big banks and has a three-year phase-in period for small banks. However, relaxation of rules might delay implementation for small banks and provide one more year to big banks.

Regulators’ decision might include permit for banks to cater demand of loans with lower credit ratings and provide loans to the companies, including energy and travel, which can be risky in the future. Notably, these companies have been hit hard due to the pandemic and curtailment of global economic activity. Therefore, with easing of capital and liquidity rules, banks might provide further lending support with additional credit risks.

Conclusively, with the coronavirus crisis already hurting the economy, if regulators ease out the rules framed to protect the financial system in such turbulent times, banks will act responsibly to conserve capital with the retention of earnings.

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