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Fed Chair: COVID-19 Downturn "Significantly" Worse Than Any Recession Since WWII

May 20, 2020, 09:05 AM
Filed Under: Economy

The federal bank regulatory agencies announced temporary changes to their supplementary leverage ratio rule. The temporary modifications will provide flexibility to certain depository institutions to expand their balance sheets in order to provide credit to households and businesses in light of the challenges arising from the coronavirus response.

Issued by the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency, the interim final rule permits depository institutions to choose to exclude U.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of the supplementary leverage ratio. If a depository institution does change its supplementary leverage ratio calculation, it will be required to request approval from its primary federal banking regulator before making capital distributions, such as paying dividends to its parent company, as long as the exclusion is in effect.

The Board also asked for feedback on additional questions relating to the interim final rule, and outlined efforts to stabilize the economy.

Speaking before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Fed Chair Chair Jerome H. Powell noted that available economic data for the current quarter show a sharp drop in output and an equally sharp rise in unemployment.

"By these measures and many others, the scope and speed of this downturn are without modern precedent and are significantly worse than any recession since World War II," he said. "Since the pandemic arrived in force just two months ago, more than 20 million people have lost their jobs, reversing nearly 10 years of job gains. This precipitous drop in economic activity has caused a level of pain that is hard to capture in words, as lives are upended amid great uncertainty about the future. In addition to the economic disruptions, the virus has created tremendous strains in some essential financial markets and impaired the flow of credit in the economy."

The agencies are providing this temporary exclusion to enable depository institutions to expand their balance sheets as appropriate to serve as financial intermediaries and serve their customers.

The supplementary leverage ratio generally includes subsidiaries of bank holding companies with more than $250 billion in total consolidated assets. The rule requires them to hold a minimum ratio of 3 percent, measured against their total leverage exposure, with more stringent requirements for the largest and most systemic financial institutions.

The change will be effective once the rule is published in the Federal Register and will be in effect through March 31, 2021. Comments will be accepted for 45 days after publication in the Federal Register.

To read the Chairman's testimony in its entirety click here

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