By Pete Schroeder WASHINGTON (Reuters) -The Federal Reserve unveiled a proposal on Wednesday that would overhaul how much capital large global banks must hold against relatively low-risk assets, as part of a bid to boost participation in U.S. Treasury markets. That plan, which the Fed voted to advance by a vote of 5-2, is the […]
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Fed advances plan to ease bank leverage requirements
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By Pete Schroeder
WASHINGTON (Reuters) -The Federal Reserve unveiled a proposal on Wednesday that would overhaul how much capital large global banks must hold against relatively low-risk assets, as part of a bid to boost participation in U.S. Treasury markets.
That plan, which the Fed voted to advance by a vote of 5-2, is the first step in what could be several deregulatory initiatives helmed by the Fed’s new top regulatory official, Vice Chair for Supervision Michelle Bowman.
The proposal would reform the so-called “enhanced supplementary leverage ratio” so that the amount of capital banks must set aside is directly tied to how large a role each firm plays in the global financial system.
Fed policymakers touted the changes as a necessary fix, as the requirement imposed as a backstop following the 2008 financial crisis had gradually grown over the years to occasionally constrain bank activities, particularly thanks to the rapid rise in government debt in recent years. Given the leverage requirements direct banks to set aside capital regardless of risk, some Fed officials worried the requirement disincentivized large banks from facilitating Treasury market trading, particularly during times of stress.
The banking industry has pushed for relief from the rule for years, arguing it unnecessarily impedes their activities and discourages them from facilitating trading in lower-risk assets like Treasury bonds.
“It’s a good policy to add even more depth to the world’s most liquid market,” said Joseph Lavorgna, counselor to Treasury Secretary Scott Bessent, who had advocated for SLR changes since joining the Trump administration.
Reaction on Wall Street to the proposal was muted, as it was not as aggressive as some other ideas considered, such as exempting Treasury debt altogether from the capital requirement.
“It may free them up to lend in other products, but holding Treasuries is probably not what they’re going to do because there is a lot of interest rate risk in that and mark to market risk, especially during times of volatility like this,” said John Velis, Americas macro strategist at BNY. “What it could accomplish is, in periods of stress, if the banks are able to expand Treasury holdings so they can intermediate between buyers and sellers, it may offer some relief during those kinds of squeezing periods.”
Bowman noted at Wednesday’s meeting that while the plan creates sizeable capital reductions at the bank level, it would not allow firms to pay out more to shareholders, as the overarching holding companies would remain constrained by additional capital requirements. Instead, firms would be able to reallocate capital within their organizations more efficiently, she said.
Depository institution subsidiaries at those banks would see capital requirements fall by an average of 27%, or $213 billion. Global bank holding companies would see a 1.4% capital reduction, or $13 billion.
Fed Chairman Jerome Powell said in a prepared statement it was “prudent” to reconsider the rule, given the increase in safe assets on bank balance sheets over the last decade.
Under the current rule, banks must set aside a flat percentage of capital in reserve against all assets. Under the new approach, similar to one proposed but not completed in 2018, banks instead would have to hold capital that is equal to half of their “GSIB surcharge,” which is an additional capital requirement imposed on the nation’s largest banks, and set based on their overall footprint in the financial system.
While the proposal is expected to advance, two Fed governors indicated they plan to oppose the proposed changes at the Wednesday meeting. Fed Governors Adriana Kugler and Michael Barr said in separate prepared statements they will vote against the proposal, citing the sizeable decrease in capital requirements and skepticism the changes would meaningfully improve bank activities in Treasury markets.
Barr previously served in Bowman’s role as the Fed’s top regulatory official under President Joe Biden.
(Reporting by Pete Schroeder; additional reporting by Davide Barbuscia and Lananh Nguyen; editing by Diane Craft)