Fed Says Banks Weathered Pandemic Well As Leverage Remains Low

Banks in the United States remain well capitalized as leverage remains low, the Federal Reserve said in its latest Financial Stability Report.

• The Tier 1 ratio, which measures the equity capital versus risk-weighted assets, increased on net for the majority of American banks over the past year.
• The Fed said banks have weathered the pandemic “well,” as profitability recovered and credit quality performed better than market expectations.
• The largest banks reduced capital distributions, as caps on dividends were implemented, along with restrictions on share repurchases.
• Growth was recorded in low-risk assets such as central bank reserves, Treasury securities, and government-guaranteed public-private partnership (PPP) loans which pushed total assets significantly higher.
• Large banks ended 2020 with the ratio of tangible capital to total assets remaining below pre-pandemic levels.
• Meanwhile, leverage at hedge funds and life insurance companies continues to be high, as insurance firms invest heavily in corporate bonds and hold collateralized loan obligations (CLOs).