The Federal Reserve is set to meet on Wednesday to discuss a proposal that could ease leverage rules for banks, a move that has been long-awaited by the industry. The proposal aims to modify the supplementary leverage ratio (SLR), which currently requires banks to hold capital against assets regardless of their risk level.
Originally designed as a safeguard to ensure that banks maintain capital against even low-risk assets like U.S. Treasury debt, the industry argues that the SLR has become a hindrance, especially during times of market stress when trading in U.S. Treasury markets is crucial.
The Federal Reserve had previously hinted at potential adjustments to the SLR after providing exemptions during the COVID-19 pandemic. Fed officials now plan to introduce a more sustainable solution that could provide relief to banks while still maintaining stability in the financial system.
Fed Chairman Jerome Powell emphasized the need for a leverage ratio that acts as a backstop rather than a binding constraint. The proposed changes would likely involve tweaking the formula for calculating the enhanced SLR (eSLR) for the largest banks, potentially linking leverage requirements to the overall risk posed by each institution.
While specific details of the proposal are yet to be disclosed, alternative methods of relief, such as exempting Treasury securities from the requirement altogether, are being considered. The Federal Reserve is expected to seek feedback on these options before finalizing the changes.
The proposed leverage changes are part of a broader deregulatory agenda spearheaded by Vice Chair for Supervision Michelle Bowman. President Donald Trump’s administration has prioritized reducing regulations to stimulate economic growth, and the overhaul of capital requirements for banks is seen as a critical step in this direction.
However, critics of the plan, including Senator Elizabeth Warren, have raised concerns about the potential risks associated with relaxing rules that are designed to safeguard the stability of the banking system. Warren warned that weakening the SLR could lead to increased debt levels among big banks, posing a threat to the overall economy.
As the Federal Reserve moves forward with its proposal, the industry, regulators, and lawmakers will continue to debate the implications of the proposed changes on the financial system. Stay tuned for further updates on this important development.
This article is written by Pete Schroeder and edited by Sam Holmes.
