The Trump administration is making moves to cut banks’ capital requirements in what could be one of the biggest changes in over a decade. The Supplementary Leverage Ratio (SLR) is set to be reduced, a rule that mandates big banks to hold a certain amount of high-quality capital against their total leverage. This rule was put in place in 2014 after the financial crisis to prevent another economic collapse.
Bank lobbyists have been pushing for this change, arguing that the current rule penalizes banks for holding low-risk assets like US Treasuries and hinders their ability to facilitate trading and extend credit. They believe that easing the SLR rule would allow banks to support market liquidity during times of stress.
Critics, however, are concerned about the timing of this decision, given the recent market volatility and policy changes under the Trump administration. Some experts believe that relaxing capital standards at this time could pose risks to the economy and the stability of banks.
Despite the criticism, leading policymakers like US Treasury Secretary Scott Bessent and Federal Reserve Chair Jay Powell have expressed support for easing the SLR rule. They believe that this change could benefit the Treasury market and help reduce borrowing costs.
The biggest eight US banks are currently required to have tier one capital worth at least 5% of their total leverage. This is higher than the standards set for European, Chinese, Canadian, and Japanese banks. Lobbyists are hoping that the US will align its leverage ratio requirements with international standards.
One option being considered is to exclude low-risk assets like Treasuries from the leverage ratio calculation, which could free up balance sheet capacity for US banks. However, this move could make the US an international outlier and prompt similar requests from banks in other regions.
While the Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation have not commented on these potential changes, it is clear that the Trump administration is pushing for deregulation in the banking sector. Only time will tell how these changes will impact the financial industry and the overall economy.
