COVID RESPONSE – FRB – Federal Supervision and Regulation Report

May 8, 2020Banking System Conditions
Banks are showing strong capital positions, aggregate common equity tier 1 (CET1) capital ratio ended 2019 at a high level, close to 12 percent, and as of year-end 2019. Only just less than one-half of 1 percent of bank institutions were not well capitalized. Bank deposits and loans grew at extraordinary rates in March as investors favored safe assets, pulled back from other short-term investments like prime money market funds.

First Quarter 2020
In Q1 2020, large US bank earnings declined sharply; based on a sample of large banks reporting in April, they declined more than 50 percent compared with Q1 2019. Capital levels have declined, driven primarily by increases in risk-weighted assets. Market-based indicators of bank health, such as the market leverage ratio and credit default swap (CDS) spreads, started to deteriorate in the latter half of February as investors began to price in the impact of the potential economic contraction. Market leverage ratio fell mid-February into the latter half of March, then recovered somewhat.
Use of Capital and Liquidity Buffers. FRB and the other federal banking agencies issued a statement and FAQs to encourage banks to use their capital and liquidity buffers to serve households and businesses. Issued interim final rules so auto capital distribution restrictions phase in gradually.

Delaying CECL Accounting Standard
FRB and other US banking agencies issued the CECL final rule to allow firms to mitigate the estimated impact of the CECL accounting methodology on capital for up to two years.

Supplementary Leverage Ratio
On a temporary basis, Fed adopted an interim final rule to exclude Treasury securities and deposits at Fed banks from supplementary leverage ratio requirement for holding companies to ease strains in Treasury market resulting from the current COVID-19 crisis.
Encourage Use of Liquidity Facilities. The federal banking agencies adopted an interim final rule to neutralize regulatory capital effects of participating in the Money Market Mutual Fund Liquidity Facility (MMLF) and Paycheck Protection Program Liquidity Facility (PPPLF) and to encourage participation.

Early Counterparty Risk Measures
To improve market operations and smooth disruptions, allowed for early adoption by banks of a new method for measuring counterparty credit risk in derivative contracts.

Community Bank Leverage
Rules modify the community bank leverage ratio framework so banking organizations with a leverage ratio of 8 percent or greater that meets certain other criteria may temporarily elect to use the community bank leverage ratio framework via CARES Act.

Supervisory Developments
FRB supervisors focusing in the short-term on supporting financial institutions as they meet challenges of COVID-19 containment measures for customers, local communities. FRB and other agencies encourage banks to work with borrowers affected by COVID-19. Revised interagency statement on loan modifications and reporting for financial institutions working with customers affected by the coronavirus issued on Apr. 7, 2020, explains agencies won’t criticize those working with borrowers in a safe, sound manner. FRB has temporarily ceased most regular examination activity for banks with less than $100 Billion total consolidated assets, except if critical to safety or consumer protection.

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