Finance

Villains of 2008 try to be the saviors of 2020

With stronger balance sheets and layers of new oversight imposed since the last crisis, the banks are now touting a "we're here to help" message.

Bank of America

America's banks are entering the most severe global crisis since 2008 as a pillar of strength in the economy, and that's giving them a powerful lever to press Congress to relax regulations to keep credit flowing.

It's a stunning turn of events after a decade in which banks found their political standing in Washington severely tarnished over their role in unleashing the last financial meltdown and the multibillion-dollar government bailout that followed.

With stronger balance sheets and layers of new oversight imposed since the last crisis, the banks are now touting a "we're here to help" message — which some delivered personally to President Donald Trump at the White House earlier this month. They're also leaning on lawmakers and regulators to ease rules that they say could limit relief to consumers and small businesses.

The effort is bearing fruit. Senate Republicans granted a handful of the banks' key requests in their coronavirus legislation this weekend, which stalled on Sunday, including what could be a vast government backstop of their operations.

But the lobbying push is also facing resistance from lawmakers who say they're concerned about the longer-term consequences to the financial system — and note that some of the banks' requests were lobbying priorities well before the emergence of Covid-19.

“The height of a pandemic is not the time to tear down rules that protect hardworking families from financial crises," said Sen. Sherrod Brown (D-Ohio), the top Democrat on the Senate Banking Committee. "Banks should be pitching in to help their communities and working to keep families afloat, not lobbying Congress for handouts."

Paul Merski, group vice president for congressional relations and strategy at the Independent Community Bankers of America, rejected that argument, saying banks aren't looking for handouts but instead want to see credit flowing to small businesses that are at risk of shutting their doors.

"There are no bank bailouts needed because the banks going into this pandemic are in extremely solid positions, both with capital levels and liquidity levels," Merski said. "This is absolutely not a 2008 situation. It's the reverse."

On Capitol Hill, the current potential legislative vehicle is a "phase 3" stimulus package but Congress will likely pass additional legislation to address the economic fallout of the pandemic. Among the industry's asks are recommendations that would let banks more freely dip into their financial buffers and allow more time to comply with a new accounting standard that requires them to immediately record potential losses on their books when they make loans.

Some Hill Democrats and watchdog groups were already on alert after one of the industry's lead trade associations — the Bank Policy Institute — published a list of deregulatory recommendations in the early days of the pandemic reaching the U.S.

"That really made it difficult to have an open conversation about the full range of measures that ought to be taken here," said Graham Steele, director of the Corporations and Society Initiative at the Stanford Graduate School of Business and a former aide to Brown. "It's made this a hard environment to engage in because there are just concerns that we're only going to get the deregulatory ideas, we're not going to get those other pieces that build the system back up."

But in recent weeks, the nation's largest banks have embarked on a remarkable PR campaign, touting their financial strength and a willingness to help save an economy that Wall Street nearly destroyed 12 years ago.

It started with a fully televised White House meeting on March 11 where the CEOs of Bank of America, Citigroup and other banking giants pledged to do their part.

They've since made joint promises to temporarily stop buying back their own stock to help free up capital — pausing a controversial practice that mainly helps investors — and to tap into emergency Federal Reserve funding to remove the stigma attached to that and encourage other banks to do the same.

"The Covid-19 pandemic is an unprecedented challenge for the world and the global economy, and the largest U.S. banks have an unquestioned ability and commitment to supporting our customers, clients and the nation," eight of the country's biggest banks said via their exclusive trade association, the Financial Services Forum.

Banks are now trying to tap into the emerging goodwill with requests to cut red tape.

Some of the asks are intended to address logistical challenges as much of America stays at home for potentially months to come. Others are focused on making sure more lenders can participate in federal small-business lending programs that are quickly ramping up and allowing larger businesses to receive the assistance.

Some requests target financial safeguards that have been implemented in the years since the crisis.

The recommendations vary by type and size of bank, which is typically the case in Washington's finance industry community, and the companies have been jockeying over where to focus their lobbying firepower.

Bank representatives said a few consensus items are emerging.

One area of focus for banks are regulations governing the capital and liquidity buffers they must maintain to support their operations.

Regulators have encouraged the banks to dip into those buffers for lending. But companies want more certainty through concrete legislation or regulation that they will be able to do so. Small banks are lobbying Congress to allow more community lenders to take advantage of streamlined capital requirements.

Regional, mid-size and community banks are urging Congress and financial regulators to delay the industry's compliance with a rule that requires lenders to immediately account for potential losses when they issue loans.

The thinking behind the rule is that banks should have funds to cover losses earlier in the life of a loan. Banks argue that the required reserves take away resources that could be put toward lending.

Some lenders have floated the idea of delaying required stress tests that are designed to gauge the resiliency of banks in a crisis. Some want regulators to temporarily suspend bank examinations. A potential increase of the Federal Deposit Insurance Corp.'s deposit insurance limit is also top of mind for some banks.

Banks' lobbying efforts paid off this weekend, when Senate Republicans' revealed a coronavirus economic stimulus bill that would give the Federal Deposit Insurance Corp. expanded authority to backstop the banking system beyond the traditional $250,000 of insurance it offers depositors.

The GOP proposal would allow the FDIC to guarantee the banks' own debt — including that of the biggest Wall Street banks -- and provide an additional guarantee for business transaction accounts used for things like payroll. The measure, which would resurrect authority used by the FDIC during the 2008 meltdown, prompted immediate criticism that Congress was offering a giveaway to Wall Street banks.

"The FDIC is supposed to stand behind Americans' hard-earned deposits, not reward big banks for taking on too much debt," Steele said.

In addition, the bill would make it easier for small banks to take advantage of less-onerous capital requirements and give lenders a break from complying with the accounting standards that they've argued could inhibit lending during the outbreak.

Moderate Democrats are also exploring the ideas. Rep. Bill Foster (D-Ill.) has been soliciting recommendations for how to free up credit by temporarily easing certain bank regulations and intervening in markets. The business-friendly New Democrat Coalition in the House wants Congress to encourage financial agencies to publish regulatory guidance for banks that want to provide forbearance on home mortgage and other consumer loan payments.

Industry watchdogs are lobbying against the banks' efforts and looking to further rein in the industry by banning financial firms' payouts to investors via stock buybacks and dividends.

"It would be dangerously counterproductive and irresponsible to weaken the very rules that have made the financial system so much stronger and more resilient," Better Markets President Dennis Kelleher said. "Those rules are why we don’t already have a financial crisis."