Washington, D.C. — Today, the Federal Reserve Board released the results of the annual bank stress tests. In addition, the Fed, the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), the Securities and Exchange Commission, and the Commodity Futures Trading Commission voted to finalize changes to the Volcker Rule. Meanwhile, the Fed, FDIC, OCC, Federal Housing Finance Agency, and Farm Credit Administration also voted to eliminate bank inter-affiliate margin requirements. Gregg Gelzinis, senior policy analyst for Economic Policy at the Center for American Progress, released the following statement:
Although the three different financial regulatory actions today are technical and cover different aspects of banking policy, they share a common theme: favoring Wall Street’s interests at the expense of workers and families—at the worst possible time.
The Fed’s refusal to suspend bank dividends increases the likelihood of future bank failures and needlessly puts the economic recovery at risk. The Fed has set up huge emergency lending programs that have helped contain financial sector stress for the moment. Failure to require conservation of bank capital to support lending and to absorb potentially severe coronavirus-related losses in the coming quarters is inexplicable in these circumstances. Bank capacity to absorb losses shouldn’t be squandered to serve the near-term interests of shareholders and executives in these deeply uncertain times. The last thing our struggling economy needs is for a banking crisis to inflict even more damage on businesses and households.
The Fed also decided to hide the bank-by-bank results of the additional coronavirus-related analyses conducted as part of this year’s stress tests. This incredible lack of transparency damages the credibility of the exercise and could undermine confidence in the banking system. Aggregate bank capital may look sufficient, but individual bank failures could have a domino effect within our deeply interconnected financial system. The Fed should immediately release these results and direct any banks with capital shortfalls to raise additional equity now while they are still able.
On the changes to the Volcker Rule’s definition of “covered fund” and the elimination of bank inter-affiliate margin requirements, Gelzinis added:
The decision to finalize these rules—in the middle of an economic crisis, no less—compounds the damage already done to the post-crisis regulatory framework over the past several years. The Volcker Rule change would permit investments in venture capital funds and other highly-risky fund vehicles—the very type of speculative investments that the Volcker Rule’s statutory provisions in the Dodd-Frank Act were designed to prevent. The changes also increase the entanglements between banks and their sponsored hedge funds and private equity funds, while eliminating a crucial anti-evasion provision.
The elimination of inter-affiliate margin requirements reduces resources available to an insured bank to absorb losses if one of its affiliates cannot meet its swap obligations. This increases leverage and risk at the commercial banking subsidiaries of Wall Street banks. Both of these final rules reject important lessons learned in the last financial crisis, putting workers and families at greater risk.
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