Federal regulators are discussing relaxing liquidity rules on banks and raising the amount of leverage they can hold to reduce financial pressure on them stemming from the coronavirus pandemic, sources said Tuesday.
The steps being discussed could allow banks to take on a higher proportion of loans with lower credit ratings, and make banks more likely to extend loans to companies that could, in the near future, be classified as risky.
Those companies include firms in the energy and travel sectors, which have been particularly hit by the unfolding public health crisis and a related global pullback in economic activity.
The Federal Reserve, which determines how much extra capital, or liquidity, a bank should hold, on Tuesday released new guidance relaxing those guidelines, and may move to relax banks' leverage ratios as well, according to three sources familiar with the matter.
The Office of the Comptroller of the Currency, which regulates banks and federal savings associations, is considering relaxing its rules related to leveraged lending that were introduced in 2013, according to sources.
But the OCC has not made a final decision on whether to loosen the rules — and there is substantial resistance to doing so, according to sources.
Among the measures being considered by the OCC is the relaxing of a proposed rule over supplemental leverage ratio standards, as well as the effective date of the Current Expected Credit Loss standard.
The CECL accounting standard sets loan-risk measurements and limits the amount of certain risky loans a bank can make.
For large banks, the CECL standard became effective this year, while small banks have a three-year phase in.
The current discussion is about delaying the phase-in for small banks by one year, and giving big banks one more year before the standard affects them.
Those who are opposed to relaxing rules adopted seven years ago note that they have been effective at keeping banks from extending risky loans that could have put them in a precarious position during the present turmoil.
There is some pushback against allowing banks to increase their exposure to risky loans during a time of economic uncertainty.
Banks have contended that relaxing such rules would allow them to continue funding companies in sectors where cash flow — and attractiveness to lenders — is deteriorating by the day.
The nation's financial regulators have raced to take emergency action to address the coronavirus crisis, which has tanked global markets and threatened to send the U.S. economy into recession.
Over the weekend, the Federal Reserve said it will slash its benchmark interest rate to near zero, and also announced $700 billion in stimulus measures
In addition to the liquidity changes announced Tuesday, the central bank said it would create a new credit facility to provide assistance to companies struggling to get short-term funding.
The Fed's move Tuesday boosted financial markets that have been routed in recent weeks over COVID-19, the disease caused by the coronavirus.
So far, there have been more than 180,000 people infected worldwide, with related deaths topping more than 7,000.
On Monday, the Dow Jones Industrial Average and S&P 500 suffered their biggest one-day losses since 1987, falling 12.9% and 12%, respectively.
On Tuesday, the Dow had rallied by nearly 5% as of midafternoon.