Divided Fed proposes rule to ease capital requirements for big Wall Street banks

The Federal Reserve recently proposed a new rule that could potentially ease a key capital requirement for banks, known as the enhanced supplementary leverage ratio. This rule was put in place after the financial crisis to ensure the stability of the nation’s largest banks by regulating the quantity and quality of capital they hold on their balance sheets.

However, in recent years, banks and Fed officials have been advocating for a rollback of this requirement, citing concerns over Treasury market liquidity and the increasing amount of safe assets on bank balance sheets. Fed Chair Jerome Powell stated that the leverage ratio has become more restrictive due to the accumulation of low-risk assets on bank balance sheets, prompting a reevaluation of the rule.

The proposed changes would reduce the top-tier capital requirements for big banks by 1.4%, amounting to around $13 billion for holding companies. Subsidiaries would see a larger reduction of $210 billion, which would still be held by the parent bank. The new rule would lower capital requirements to a range of 3.5% to 4.5% for holding companies and subsidiaries, down from the current 5% and 6%, respectively.

The goal of the proposed changes is to allow banks to take on more lower-risk assets, such as Treasurys, without being penalized by the leverage ratio. The Fed aims to use capital requirements as a safety net rather than a hindrance to bank activity. However, not all Fed officials are in agreement with the proposed changes.

Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller support the changes, stating that it will help build resilience in U.S. Treasury markets and reduce the need for Fed intervention during stress events. On the other hand, Governors Adriana Kugler and Michael Barr oppose the move, expressing concerns that banks may use the relaxed requirements to prioritize shareholder returns over Treasury market intermediation.

The proposed changes align with global Basel standards for banking regulations, aiming to strike a balance between promoting safety, soundness, and financial stability while allowing banks to operate more efficiently. The Fed has opened a 60-day public comment window for feedback on the proposal before making a final decision.

Overall, the proposed changes to the enhanced supplementary leverage ratio could have significant implications for the banking industry and the stability of financial markets. It will be crucial for stakeholders to carefully consider the potential impacts of the rule change and provide feedback during the comment period.