The Federal Reserve has proposed easing a key capital rule that banks have argued limits their ability to operate effectively. The rule in question is the enhanced supplementary leverage ratio, which dictates the amount and quality of capital banks must keep on their balance sheets. Originally implemented in the wake of the financial crisis to safeguard the stability of the largest banks, the rule has faced criticism in recent years.
As bank reserves have increased and concerns have arisen regarding Treasury market liquidity, both Wall Street executives and Fed officials have advocated for scaling back the requirements. The current regulations treat all capital the same, but the proposed changes aim to address the evolving landscape of the banking industry.
Fed Chair Jerome Powell highlighted the need to revisit the original approach due to the significant increase in low-risk assets on bank balance sheets. The Fed’s proposal would reduce the top-tier capital requirements for holding companies by 1.4%, totaling around $13 billion. Subsidiaries would also see a decrease of $210 billion, which would still be held by the parent bank. These adjustments aim to lower capital requirements to a range of 3.5% to 4.5%, down from the current 5%.
Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller expressed support for the changes, emphasizing the importance of building resilience in U.S. Treasury markets. They believe that the proposed adjustments will mitigate market dysfunction and reduce the need for Federal Reserve intervention during future stress events.
On the other hand, Governors Adriana Kugler and Michael Barr have voiced opposition to the move, expressing concerns about the potential implications of the proposed changes. Barr pointed out that the new regulations may not effectively address issues during times of stress and could incentivize banks to prioritize shareholder returns over Treasury market intermediation.
The proposed revisions align with global Basel standards, which establish guidelines for banks worldwide. The ultimate goal is to strike a balance between promoting safety, soundness, and financial stability while allowing banks to engage in activities that support economic growth.
In conclusion, the Federal Reserve’s proposal to ease the enhanced supplementary leverage ratio reflects a broader effort to adapt regulatory frameworks to changing market conditions. The 60-day public comment period will provide stakeholders with an opportunity to weigh in on the potential impact of the proposed changes before they are finalized.
