Much ado about … little? Banks had chance at some pandemic relief when it came to asset levels — but many local institutions didn’t need it

Patrick Ryan.

When have bankers ever said no to a peeling back of regulations?

Very recently.

With banking segments and industries hard-hit by the COVID-19 pandemic, federal regulators offered back in April to give financial institutions temporary relief on leverage ratio requirements — or, put simply, the level of assets they have to maintain in the bank. But, not many banks have taken advantage of the emergency measure in the months since it was enacted.

Patrick Ryan, CEO and president at Hamilton-based First Bank, explained that, as far as local banking institutions such as his are concerned, there’s just not much need for it.

“I don’t want to call it a total nonevent, but the practical reality right now is most banks have the capital they need to lend,” he said. “Leverage ratios are only important if a bank is at or near its capital limit, but the majority of banks aren’t close to those minimum requirements.”

All of the country’s banks are subject to a minimum amount of assets they have to maintain on their balance sheets. The Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corp. joined together to introduce a rule lessening the leverage ratio requirements for community banks until the end of the year as part of the CARES Act.

“If things had gotten bad enough that you started to see massive reductions in capital, then that ratio change might have more of an impact,” Ryan said. “For the time being, access to credit doesn’t appear to be much of an issue in the marketplace right now.”

For that reason, a review done by S&P Global indicated that more than 2,700 community banks that qualified for these leverage ratios had declined to adopt them about two months after the guidance was issued.

That doesn’t mean banks haven’t been hard-hit by the pandemic. Banks with a significant lending portfolio in sectors such as hospitality or travel are particularly vulnerable, Ryan said.

But, as he added, there’s a silver lining: Bank capital levels were at a relatively comfortable point heading into the COVID-19 crisis.

“If you look at overall industry capital ratios, the industry had significantly more capital than it did heading into the Great Recession,” he said. “Depending on what side of the aisle you’re on, you might say that’s because there were some lessons learned by banks; others would say that’s only because the regulators made them do it.”

What federal regulators also have done — and Ryan believes it has been far more appreciated by banks — is they made clear that banks would not be penalized for working closely with stressed borrowers during COVID-19’s spread.

“In other economic environments, banks that were lenient with borrowers would get criticized by those arguing we should be taking a harder line with folks,” he said. “I think having healthy capital levels already, combined with perhaps less fear of regulatory retribution, were factors that kept lending in good shape throughout the pandemic.”

Even without a future peeling back of regulations during what’s hoped to be the remainder of the pandemic timeline, Ryan expects banks won’t come close to experiencing what they did during the financial crisis.

“As we sit here today, we’re pretty optimistic — not that there won’t be any pain at all from the pandemic, but that it’ll be manageable,” he said.