Brainard: Banks’ COVID-19 Resilience Shows Importance of Strong Capital, Liquidity Buffers

In remarks at a virtual industry event today, Fed Governor Lael Brainard commented on the strong performance of the banking sector during the COVID-19 pandemic, emphasizing that strong capital and liquidity positions will continue to be important as banks continue to face a high degree of uncertainty. She noted that the resilience of the banking sector in response to COVID-19 “underscores the importance of guarding against erosion of the strong capital and liquidity buffers and risk-management, resolution, and stress-testing programs put in place pursuant to the Dodd-Frank Act.”

December stress tests by the Fed showed that while the largest banks are sufficiently capitalized to withstand a renewed downturn in the coming years, the projected losses take some large banks close to their regulatory minimums, Brainard said, adding that “it is important for banks to remain strongly capitalized in order to guard against a tightening of credit conditions that could impair the recovery.”

Brainard also discussed the need for money market fund reform, noting that the run in March 2020 forced MMFs to rapidly reduce their commercial paper holdings, which worsened stress in short-term funding markets and funding costs for borrowers shot up. She added that “the turmoil highlights the need for reforms to reduce the risk of runs on prime money market funds that create stresses in short-term funding market.”

“Reforms that address the first-mover advantage to investors that redeem early, such as swing pricing or a minimum balance at risk, could significantly reduce the run risk associated with money funds,” Brainard said.