US regulators on Wednesday proposed one of the most dramatic rollbacks of bank capital rules since the 2008 financial crisis, which would give a major victory to lenders seeking relief from the new Trump administration.
The proposed change would alter the so-called enhanced supplementary leverage ratio (eSLR), a rule that calls for the largest US banks to hold additional minimum capital based solely on their size.
The largest and most important US lenders, such as JPMorgan Chase (JPM), Bank of America (BAC), Goldman Sachs Group (GS), and Morgan Stanley (MS), currently must keep those eSLR ratios at 5%.
The proposal unveiled by regulators Wednesday would lower that requirement for big bank holding companies by 1.4 percentage points, or approximately $13 billion. The ratio would drop by 10 percentage points for the lenders’ bank subsidiaries, according to officials.
The change to this key capital ratio is designed to make it easier for banks to lend more freely and help create an even bigger pool of buyers for US Treasurys. Banks have complained this ratio penalizes them for holding lower-risk assets such as Treasury bonds.
The Federal Reserve governors approved the proposal Wednesday in a 5-2 vote, meaning it now will be put out for public comment. Two other regulatory agencies, FDIC and OCC, also collaborated on the proposal.
“Today’s proposal is an important first step in balancing the stability of the financial system and Treasury market resilience, while preserving safety and soundness,” the Fed’s new top banking regulator, Michelle Bowman, said in a statement.
Not everyone is on board, however. Two Fed governors — Michael Barr and Adriana Kugler — are objected to the proposal based on their views that the benefits to easing the capital constraint for the Treasury market doesn’t outweigh the financial stability risks.
“I believe this reduction in capital requirements at the bank subsidiaries of the nation’s largest and most complex banking organizations will increase systemic risk in a manner that is not justified,” Kugler said in a statement.
Barr added in a separate statement that this would reduce bank subsidiary capital by $210 billion for the systemically important institutions.
“Firms will likely use the proposal to distribute capital to shareholders and engage in the highest return activities available to them, rather than to meaningfully increase Treasury intermediation,” he said.
Treasury Secretary Scott Bessent previously signaled that regulators were close to easing this capital rule as part of a broader deregulatory push by the Trump administration.
Such an adjustment would be “broadly positive for the biggest banks,” TD analyst Jaret Seiberg said in a recent research note. He added that it would help “the traditional trading banks more than the traditional commercial banks.”
But Democratic Sen. Elizabeth Warren warned ahead of the vote that loosening capital requirements would make the financial system less safe.
“Deregulating those banks is planting the seeds for another financial catastrophe,” she told reporters Tuesday.
More changes could still be on the way. Bowman, who is the Fed’s vice chair for supervision, made it clear in a speech Monday that revisiting the eSLR requirement is just the start of broader capital rollback considerations.
Federal Reserve Board Governor Michelle Bowman, who also acts as the Fed’s vice chair for supervision. REUTERS/Kevin Mohatt ·REUTERS / Reuters
“This proposal takes a first step toward what I view as long overdue follow-up to review and reform what have become distorted capital requirements,” said Bowman, the Fed’s vice chair for supervision and a Fed governor.
Other capital requirements under consideration for future adjustment include the surcharge on global systemically important banks and the various asset thresholds that determine which banks face what rules.
This will undoubtedly please the bosses of some giant banks, including JPMorgan CEO Jamie Dimon, who has called for regulators to revisit many of their rules.
On July 22, the Fed will host a conference to bring together leaders to discuss the capital framework for US banks.
The Fed also said Monday it will no longer consider reputation risk as part of its bank exams, in another sign of a readjustment under new leadership.
“Regulations should not be created in a static world of ‘set it and forget it,'” said Bowman, who also noted that “a solid capital foundation in the banking system is critical to support safety and soundness and financial stability.”
JPMorgan Chase CEO and Chairman Jamie Dimon, who has called for a broad rethink of bank capital rules. REUTERS/Evelyn Hockstein ·REUTERS / Reuters
Big banks and their DC lobbyists have long taken issue with the unintended constraints of their leverage capital requirements, which can serve as handcuffs during times of stress.
This came to a head at the start of the COVID-19 pandemic in 2020 when US monetary and fiscal policy rapidly expanded the $30 trillion market for US Treasurys and banks acting as intermediaries between the government and investors could not catch up.
“Simple reforms to return leverage ratio requirements to their traditional role as a capital backstop could improve Treasury market functioning by building resilience in advance of future stress events,” Bowman said Monday.
Bowman also noted that this could reduce the chances that the Fed would need to intervene in Treasury markets during chaotic periods.
As far back as February, Fed Chair Jerome Powell has also voiced his concern about Treasury market liquidity, pointing to reducing the supplementary leverage ratio as an “obvious thing to do.”
