Why the Fed Is Ending Its Big Covid Break for Banks

After markets gyrated in March 2020, the U.S. Federal Reserve pumped trillions of dollars into a financial system rocked by the coronavirus pandemic. It also gave banks a one-year break from a rule it feared could make them pull hundreds of billions out of the economy at an inopportune time. As the March 31 end of the waiver to something called the supplementary leverage ratio (SLR) approached, many banks argued that it should be extended, lest they be forced to retrench while the economy is still fragile. Bank critics, including Senator Elizabeth Warren, pushed to end the break, noting that banks were managing to return tens of billions to shareholders through buybacks and dividends. The Fed decided to let the waiver lapse, but said it would propose other ways of addressing the banks’ concerns.

It’s a standard developed by global bank regulators after the 2008 financial crisis. It requires banks to set aside more capital as their assets grow. Unlike pre-crisis rules, it does not allow banks to adjust the capital reserve according to their judgment of the riskiness of their holdings -- that is, holding safe assets like Treasuries doesn’t reduce the requirement.