High Stakes: Federal Reserve Moves to Ease Bank Capital Rules, Igniting Debate
High Stakes: Federal Reserve Moves to Ease Bank Capital Rules, Igniting Debate
The Federal Reserve has officially unveiled a significant proposal to roll back a key capital requirement for the nation’s largest banks, a move designed to bolster the resilience of the $29 trillion U.S. Treasury market but one that has immediately sparked heated debate among regulators.
The proposal, set for a vote by the Fed on Wednesday and to be followed by a Federal Deposit Insurance Corporation (FDIC) meeting on Thursday, targets the enhanced supplementary leverage ratio (eSLR). This crucial rule, established in 2018, dictates how much capital major institutions like JPMorgan Chase, Bank of America, and Goldman Sachs must hold against their assets.
Under the new plan, the capital requirement for bank holding companies would be reduced from the current 5% to a range of 3.5% to 4.5%, with their banking subsidiaries seeing a similar reduction from 6% to the same range. Vice Chair for Supervision Michelle Bowman articulated the Fed’s rationale, stating, “The proposal will help to build resilience in U.S. Treasury markets, reducing the likelihood of market dysfunction and the need for the Federal Reserve to intervene in a future stress event.” She added that it’s crucial to proactively address “unintended consequences of bank regulation.” Fed Chair Jerome Powell has also supported revisions, arguing that the current eSLR can discourage banks from low-margin, safe activities like Treasury market intermediation.
However, the proposed changes are not without fierce opposition. Governor Michael Barr, Bowman’s predecessor, strongly objected to the plan, warning that it would weaken the eSLR and cut bank-level capital by an estimated $210 billion for global systemically important banks (G-SIBs). Barr warned of significantly increased risk, potential challenges to orderly bank resolution, and higher losses for the Deposit Insurance Fund.
Senator Elizabeth Warren, a vocal critic, also weighed in, calling the leverage rule a “critical safeguard” for financial stability and expressing concerns about the economy’s existing risks. The banking industry, which has long advocated for lighter regulation, views this as a partial win and is expected to push for further exclusions, such as Treasuries, from the ratio calculation during the upcoming 60-day public comment period.
The eSLR was originally designed as a backstop to other capital rules, treating all assets equally to prevent banks from taking on excessive risk. Critics of the rollback question whether banks will genuinely use the newfound flexibility to support the Treasury market or if it will simply allow them to distribute excess capital to shareholders. Graham Steele, a former Treasury official, suggested regulators consider more targeted solutions to address Treasury market issues without jeopardizing broader financial stability.
This move echoes the temporary relaxation of leverage ratios in 2020 during the COVID-19 crisis, aimed at freeing up lending, an exemption that expired in March 2021. As the Fed and FDIC proceed with their respective votes and discussions, the financial world will be closely watching the unfolding debate over the future of bank capital regulation.
Disclaimer: This content is aggregated from public sources online. Please verify information independently. If you believe your rights have been infringed, contact us for removal.