Divided Fed Unveils New Rule: What Eased Capital Requirements Mean for Major Wall Street Banks

The Federal Reserve is considering changes to a crucial rule that determines how much capital banks need to keep on hand. This rule, called the enhanced supplementary leverage ratio (eSLR), was originally put in place after the 2008 financial crisis to stabilize major banks.

In recent years, banks have built up significant reserves, prompting discussions about whether these requirements are still necessary. Many on Wall Street believe easing the rules could help improve liquidity in the Treasury market, a key area of U.S. finance.

Fed Chair Jerome Powell noted that an increase in low-risk assets on bank balance sheets is making the current leverage ratio feel too restrictive. He suggested it might be time to rethink the approach, arguing it’s wise to adapt to the changing financial landscape.

The proposed adjustments would lower the top-tier capital requirement for major banks by 1.4%, translating to around $13 billion for holding companies. For their subsidiaries, the drop could be as much as $210 billion, significantly easing capital constraints.

Currently, banks need to maintain a leverage ratio ranging from 5% to 6%. The proposal suggests reducing that to between 3.5% and 4.5%. Supporters, including Vice Chair for Supervision Michelle Bowman, argue this will strengthen the Treasury market and help reduce the chances of needing Fed intervention during crises.

However, there are dissenters. Governors Adriana Kugler and Michael Barr believe that this change could lead banks to prioritize higher returns over strengthening the Treasury market, potentially putting financial stability at risk.

Historically, the leverage ratio has drawn criticism for discouraging banks from holding Treasurys, which should ideally be seen as secure investments. The new proposal aligns with global banking standards set by Basel, aiming for a balance between regulatory safety and operational flexibility.

In summary, the Federal Reserve’s upcoming decision on the eSLR is crucial. It reflects changing perspectives on banking safety and the role of financial markets. As we move forward, understanding these dynamics will be essential for both investors and consumers.

You can find more about financial regulations and their implications in reports from the Federal Reserve, along with insights from experts in finance.

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