How much of a role did the nation’s largest and most important banks play in leading the economic recovery from the shock of the pandemic? Perhaps less than their advocates and some policymakers claim. Instead, government – Congress and the Federal Reserve System – deployed immense resources that did much to shield these banks from the sudden impact of the pandemic in 2020.
Those are the key takeaways from a little-noted analysis done by the Minneapolis Federal Reserve Bank. The analysis, posted on May 18, 2022, was done by Ron Feldman, chief operating officer at the Minneapolis Fed, and Jason Schmidt, a senior financial economist at the bank. They estimated that in 2020, Congress provided enough emergency aid to businesses and families to enable the banks to avoid $230 billion in loan losses. Also, they argued that had the Fed not moved to support the financial markets in 2020, the banks would have lost another $95 billion.
Unprecedented levels of emergency assistance from the government began pouring into the economy in the spring of 2020, weeks after covid struck. Congress and the Fed pulled out all the stops to keep the plunge in economic activity from settling into an enduring recession and to then engineer a quick rebound. Covid’s shock to the securities markets was so powerful that yields on 10-year Treasuries, often described as the safest investment in the world, sank to an all-time low as global financial markets fluctuated wildly.
Feldman and Schmidt argue that despite this assistance, a narrative emerged that the big banks were a major source of strength in the sharp recovery later in 2020. Large banks and others cited high and rising capital levels during the covid meltdown, higher lending and passing several rounds of stress tests. “The problem with this narrative is that each point contains material omissions,” the analysis said. “A full telling of the narrative is not one where the banks are obviously a source of strength.”
Capital levels are higher than they were before and immediately after the financial crisis, the study conceded, but it cited “a growing body of evidence” that these levels remain too low to prevent bank bailouts. Significantly higher capital requirements for the nation’s largest and most complex banks are the central plank in the Minneapolis Fed’s plan to end regulators’ designations of large banks as too big to fail.
The Bank Policy Institute, which represents the largest banks, has criticized Neel Kashkari, president of the Minnesota Fed, for calling pandemic-related government assistance to families and businesses “a bailout” for large banks. The Minneapolis Plan calls for these banks to hold substantially more capital, but it also acknowledges that the plan would reduce the profitability of the large banks.