New York Stock Exchange in Lower Manhattan on November 24, 2020 in New York City.
Spencer Platt | Getty Images News | Getty Images
The Federal Reserve proposed relaxing key capital rules that it says are limiting the ability of banks to operate, challenging them from at least two officials who say the move could undermine key safety measures.
This measure, known as the Enhanced Supplementary Leverage Ratio, regulates the volume and quality of capital banks, and requires that you maintain your balance sheet. The rules came from post-financial crisis efforts to ensure stability for the nation’s largest banks.
However, with bank reserves being built in recent years and concerns about financial market liquidity have increased, Wall Street executives and Fed officials have been asked to roll back the requirements. Regulations target all capital in the same way.
“Over the past decade or so, this severe increase in the volume of relatively safe, low-risk assets on bank balance sheets has made leverage ratios more binding,” Chairman Jerome Powell said in a statement. “It’s wise to rethink the original approach based on this experience.”
The Federal Reserve Committee is opening proposals for a 60-day public comment window.
In the draft format, the measure calls for a cut to major capital banks. The subsidiaries see a massive drop of $210 billion, which is still held by the parent bank. The standard applies the same rules to so-called globally systematic important banks and their subsidiaries.
The rules reduce capital requirements to the current 5% to 3.5% to 4.5% range, with subsidiaries reaching the same range from the previous 6% level.
The current vice-chairman of the superintendent, Michelle Bowman and Gov. Christopher Waller, have issued statements supporting the changes.
“This proposal will help build resilience in the U.S. Treasury market and help reduce the possibility of market dysfunction and the need for the Federal Reserve to intervene in future stress events,” Bowman said. “We should be proactive in addressing the unintended consequences of banking regulations, including the binding capabilities of ESLRs, while ensuring that the framework continues to promote safety, soundness and financial stability.”
Overall, the plan is trying to loosen up the banks and take on lower risk inventory such as Treasurys. This is now essentially treated as a high-yield bond for capital purposes. Fed regulators are essentially looking for capital requirements that act as safety nets rather than being bound by activities.
But former vice-chairman of the superintendent, Gov. Adriana Kugler and Michael Barr, said they oppose the move.
“Even if some Treasury market intermediaries occur during normal times, this proposal is unlikely to be useful in times of stress,” Barr said in a separate statement. “In short, companies will use this proposal to distribute capital to shareholders and engage in the best possible return activities rather than meaningfully increasing the intermediary of the Treasury.”
The leverage ratio has been criticized for essentially punishing banks that own the Ministry of Finance. According to official documents released Wednesday, the new regulations are in line with so-called Basel standards, which set standards for banks around the world.
