Trump administration prepares to ease big bank rules

Politico

2 days ago

The Trump administration is gearing up to deliver a major win to Wall Street banks: Easing rules imposed on megabanks in response to the 2008 financial crisis.
Trump-appointed regulators are nearing completion of a proposal that would relax rules on how much of a capital cushion the nation's largest banks must have to absorb potential losses and remain solvent during periods of economic stress.
The plan — being developed jointly by the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation — could be released in the coming months, according to two people familiar with the discussions who were granted anonymity to discuss plans that aren't yet public.
Treasury Secretary Scott Bessent, who is coordinating the administration's financial regulatory agenda, said earlier this month that reducing capital requirements is a 'top priority' for federal banking agencies. And he said he's expecting action on the issue 'over the summer.'
'The 2024 election ushered in the largest turnover among federal financial regulators in the history of our country, and that's starting to bear fruit,' said Ed Mills, a Washington policy analyst at Raymond James. Big banks, he said, are 'back in the driver's seat.'
The forthcoming proposal would represent the latest policy win for the banking industry, which has been closely scrutinized and regulated since the 2008 global financial meltdown. The move would be the first major banking regulation that Trump-appointed regulators take up as they advance policies they say will lead to greater economic growth.
It would also signal a major shift from last year when Biden-era regulators were pushing a plan, detested by the industry, to go in the opposite direction by proposing that large banks increase the size of their capital cushions.
The capital rule under consideration would alter what is known as the supplementary leverage ratio — an additional safeguard that requires banks to maintain a minimum level of capital based on the total size of their assets.
Bank industry groups and Republican lawmakers have argued that the requirement has constrained bank activity, particularly by discouraging the buying and selling of government debt in the form of U.S. Treasuries. The complex rule was designed as a backstop to make sure banks are equipped to absorb unexpected losses on any asset, not just ones that regulators deem riskier. The policy requires banks to hold the same amount of capital against risky loans and safe assets like U.S. Treasuries.
Bessent and Republican proponents say it will be a boon for the Treasury market because it will allow banks to better facilitate the buying and selling of government debt. Treasury markets have swooned in recent months amid Trump's trade war and concerns about spending and tax policies.
'We are pushing to have this supplementary leverage ratio either reduced or removed, and it will allow banks to buy more Treasuries,' Bessent said in a radio interview with Roger Stone last week, adding that it will help deliver on his goal of lowering interest rates. He said easing the rule could reduce Treasury yields by 0.3 to 0.6 percentage points 'over time.'
Travis Hill, the acting chair of the Federal Deposit Insurance Corporation, said this past week he expected a joint proposal with other regulators 'in the relatively near future.' The goal, he said, was to 'right size' the requirement so that it less frequently was the binding constraint on some of the largest banks.
A similar effort to loosen the supplementary leverage ratio in 2018 during the first Trump administration never came to fruition amid disagreements among regulators. And during the Biden administration banks were successful at fending off a proposal by regulators that called for significantly increasing capital requirements.
In 2020, regulators temporarily adjusted the leverage ratio during the Covid-19 pandemic, excluding Treasuries and central bank reserves from the calculation. The goal was to allow banks to more easily buy up government debt. That relief expired in March 2021, though Fed officials said at the time they were open to longer-term changes. Fed Chair Jerome Powell has in recent months expressed support for revisiting the rule.
Regulators are now debating, according to the people familiar with the discussions, whether to lower the capital requirement for megabanks by readjusting the formula or reinstating a permanent version of the pandemic-era relief that excludes Treasuries and other safe assets from the calculation.
The Fed, OCC and FDIC declined to comment on the proposal.
Wall Street critics and progressives are pushing back on the plan as a giveaway to big banks at the expense of dialing up the risks to the financial system.
Phillip Basil, director of economic growth and financial stability at Better Markets, said that weakening the minimum level of capital requirements on big banks will increase financial stability risks. He said the bank industry was using recent turmoil in the Treasury markets as a 'pretense' to win an easing of a regulation that they've long lobbied against.
'We can't, on one hand, say that we need to do something about turmoil in the Treasury markets, and on the other hand, say that there's no risk in Treasuries,' he said. 'It's an absurd argument to make.'
It's not yet clear precisely how much capital levels for the big banks will fall under either scenario that regulators are considering.
And it's also not clear the extent to which regulatory relief for big banks will translate into the Treasury market moves that the Trump administration wants to see.
The changes will 'slightly boost the demand for Treasuries' but likely won't be on the magnitude that the administration is hoping, said Gennadiy Goldberg, head of U.S. rates strategy for TD Securities.
Easing the capital rule, he said, 'will help at the margin, but I don't think it will be enough on its own to push back against the narrative that U.S. deficits are going up too quickly, and push back against worries that foreign investors are no longer the buyers that they once were.'