Global financial regulators will examine ways to encourage lending during crises, the top US banking supervisor Randal Quarles said on Wednesday, lamenting the fact that banks did not significantly use their capital and liquidity buffers through the pandemic.

The Federal Reserve unveiled a range of measures in March that temporarily allowed banks to run down their capital and liquidity buffers so they could support the businesses and individuals through lockdowns.

The buffers are the extra capital and liquidity banks have to maintain most of the time, above their minimum regulatory requirements.

“Those cushions . . . are designed to be cushions, to be used during a period like this, and for the most part, banks haven’t done that,’ Mr Quarles, the Fed’s vice-chair for supervision, told the Financial Times global banking summit. “I would have liked to have seen that happen.”

Mr Quarles also chairs the Financial Stability Board, a global panel of regulators. “We’re in the process of looking internally within the regulatory system to say, ‘what disincentives have we created in the regulatory system to the use of those buffers that perhaps we can adjust, so that the buffers become more usable in the time of stress?’”

While calling out banks’ failure to run down their buffers as the one area for improvement learned from the crisis, Mr Quarles commended banks for their overall role in providing credit to the economy and for boosting their own capital reserves so that they will be able to withstand future pandemic-related losses.

Banks have been forced to conserve capital by Fed restrictions on buying back their own shares and on increasing dividends, a source of increasing frustration from executives at banks that have been making strong profits for 2020 as a whole.

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The current Fed rules on payouts last until the end of the year. Future dividends and buybacks will be authorised based on the outcome of another round of stress tests examining the losses banks could face from the pandemic.

Mr Quarles said the results of those stress tests, which will be published by the end of the year, could lead to more differentiation in what banks were allowed to pay. The tests will take no account of recent progress towards a Covid-19 vaccine, or of improvements in unemployment rates since September, when the worst-case scenario was set.

“I think the world is evolving more benignly,” Mr Quarles said, but the Fed’s exercise would nonetheless be “a very tough test of the system . . . in the worst case”.

He said the high level of monetary and fiscal support to the US economy through the pandemic — spanning central bank bond-buying programmes to government stimulus cheques posted to households — has delayed “an inevitable wave of bankruptcies”, especially in small businesses. Those could begin to come through in the spring.

“Our best estimate currently is that, at least in the US, we’ll certainly see some of that, but it will not be a systemically disruptive phenomenon,” he said. “It certainly won’t overwhelm the system.”

Via Financial Times