Fed urges banks to lend in face of pandemic

Photographer: Andrew Harrer/Bloomberg

The Federal Reserve today — in conjunction with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation — is encouraging financial institutions to use their capital and liquidity buffers to help stimulate the economy in light of COVID-19 and current market volatility.

The central bank revised the definition of “eligible retained income,” or how much buffer banks have to store away, to better allow banks to lend money during times of stress, according to a press release. Financial institutions will now set aside the average of the previous four quarters of net income.

The Fed is concerned that the current economic climate and fears of limited liquidity will provide “strong incentive for these banking organizations to limit their lending.”

After the global financial crisis in 2008, banks were required to store away capital and liquidity in the event of another economic downturn, the Federal Reserve said in a note. In fact, the largest banking institutions have $1.2 trillion in common equity and $2.9 trillion in high quality liquid assets.

In a normal economic situation, banks usually pay out a “significant” portion of their net income and retain the rest for growth. However, in a stressed economic environment, restrictions in capital buffers help to preserve capital and promote lending activity.

However, the Fed’s efforts may not be enough to stop muted demand for large purchases like vehicles, Rutger van Faassen, vice president of consumer lending at Informa, told Auto Finance News.

“Given that the coronavirus is keeping most people at home, there will certainly be an impact on the number of people purchasing vehicles, which will impact the demand for financing,” he explained.

“In the short term lowering the cost of financing will not increase the demand for auto financing. Longer term, assuming that at some point consumers will go back to purchasing vehicles, lower rates can increase demand for auto financing,” van Faassen said.

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