Source: Jinshi Data
The US government is preparing to announce the biggest cut in bank capital requirements in more than a decade, the latest sign of the Trump administration's deregulatory agenda.
According to the Financial Times, several people familiar with the matter revealed that regulators are preparing to reduce the supplementary leverage ratio (SLR) in the coming months. The rule requires large banks to have a preset amount of high-quality capital for their total leverage ratio (including assets such as loans and off-balance sheet risk exposures such as derivatives). The rule was established in 2014 as part of a comprehensive reform after the 2008-09 financial crisis.
The SLR (supplementary leverage ratio) is the Federal Reserve's capital adequacy ratio indicator for commercial banks. The SLR is calculated as Tier 1 capital/risk assets, where Tier 1 capital includes common equity and other Tier 1 capital. After the 2008 financial crisis, the Federal Reserve revised the SLR regulations to impose restrictions on additional leverage of large US banks to prevent banking system risks.
Bank lobbyists have been fighting the rule for years, arguing that it penalizes lenders for holding low-risk assets such as U.S. Treasuries, hindering their ability to facilitate trading in the $29 trillion government debt market and undermining their ability to extend credit.
"Punishing banks for holding low-risk assets such as Treasuries will weaken their ability to support market liquidity during times of stress when liquidity is needed most," said Greg Baer, CEO of the Bank Policy Institute lobbying group.
Regulators should act now, not wait for the next event."
Lobbyists expect regulators to propose reforms by this summer.
The move to relax capital rules comes as the Trump administration is cutting regulations on everything from environmental policies to financial disclosure requirements.
However, critics say the timing of the cuts to bank capital requirements is fraught, given recent market volatility and policy turmoil under Trump.
"Given the state of the world, there are all sorts of risks -- including for U.S. banks, the role of the dollar and the direction of the economy, it simply doesn't sound like the right time to relax capital standards," said Nicolas Véron, a senior fellow at the Peterson Institute for International Economics.
A move to lower the SLR would be a boon to the Treasury market, analysts say, potentially helping Trump achieve his goal of lowering borrowing costs by allowing banks to buy more Treasuries.It would also encourage banks to start playing a bigger role in Treasury trading, as rules enacted after the financial crisis have left the industry without an edge over high-frequency traders and hedge funds.
Key U.S. policymakers have expressed support for loosening the SLR.U.S. Treasury Secretary Jeff Bessant said last week that such reforms are a "top priority" for the main bank regulators -- the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. “We need to work on the structure of the Treasury market, and part of the answer can be, and I think will be, lowering the calibration of the supplementary leverage ratio,” Fed Chairman Jerome Powell said in February.
The eight largest U.S. banks currently must hold Tier 1 capital — which includes common equity, retained earnings and other capital items that can absorb losses first — equal to at least 5% of their total leverage ratio.
Large banks in Europe, Canada and Japan are subject to lower standards, with most of them required to maintain capital levels of only 3.5% to 4.25% of total assets. Banking lobbying groups want the U.S. to bring its leverage ratio requirements in line with international standards.
Another option regulators are considering is excluding low-risk assets such as Treasury bonds and central bank deposits from the leverage ratio calculation — a temporary policy implemented for a year during the pandemic.Reinstating this exemption could free up about $2 trillion in balance sheet space for large U.S. banks, analysts at Autonomous recently estimated.
But such a move would put the U.S. out of step with international standards, and European regulators worry it could trigger banks to demand similar capital concessions for euro zone sovereign bonds and British gilts.
Most large U.S. banks are subject to other rules, such as the Fed’s stress tests and risk-weighted capital requirements, which may limit their benefits from the SLR reform. Morgan Stanley analysts estimate that only State Street is truly subject to the SLRL.
Sean Campbell, chief economist of the Financial Services Forum (a lobbying group representing the eight largest U.S. banks), said: “Excluding government bonds and central bank deposits from the SLR calculation will create a larger capital buffer for large banks compared to international standards.”
The Federal Reserve, OCC and FDIC declined to comment.
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