Even as stimulus talks stalled in the Senate, the Board of Governors of the Federal Reserve System (FRB) and the Office of the Comptroller of the Currency (OCC) introduced new measures aimed at promoting lending activity and shoring up support for short-term investment funds (STIFs). Consistent with these efforts, the FRB's Federal Open Market Committee (FOMC) issued a statement reiterating the Board's commitment to reinforcing the stability of the financial system and discussing the efforts undertaken to date.
Board of Governors of the Federal Reserve
On Monday, the FRB put forward an interim final rule that "will phase in gradually, as intended, the automatic restrictions associated with a firm's 'total loss absorbing capacity,' or TLAC, buffer requirements, if the levels decline." The principal purpose of the TLAC buffer requirements is to "limit the ability of covered companies to distribute capital in the form of dividends and discretionary bonus payments and therefore strengthen the ability of covered companies to continue lending and conducting other financial intermediation activities" during periods of economic stress.
In the event of a sharp economic disruption, however, TLAC buffer requirements can have the effect of disincentivizing lending where covered companies "realize a sudden, unanticipated drop in capital ratios." To address this concern, the FRB revised the definition of "eligible retained income," an essential mechanism of the TLAC Rule's buffer requirements. In redefining the term, the FRB seeks to incentivize financial institutions to tap their capital buffers and, accordingly, promote lending to households and businesses. This action is consistent with the broader interagency interim final rule issued last week, which also revises the definition of "eligible retained income," but for other capital buffers.
Office of the Comptroller of the Currency
One day earlier, to alleviate liquidity pressures on banks operating STIFs, the OCC issued an interim final rule to reserve authority for the OCC to temporarily extend STIF maturity limits by order. Simultaneously, the OCC issued an order extending maturity limits for STIFs affected by the market effects of COVID-19 under specified conditions.