US plans to ease capital rule limiting banks' Treasury trades
[WASHINGTON] The top US bank regulators plan to reduce a key capital buffer by up to 1.5 percentage points for the biggest lenders after concerns that it constrained their trading in the US$29 trillion Treasuries market.
The Federal Reserve, Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) are focusing on what's known as the enhanced supplementary leverage ratio (eSLR), according to sources briefed on the discussions. This rule applies to the largest US banks, including JPMorgan Chase, Goldman Sachs and Morgan Stanley.
The proposal would lower a bank holding company's capital requirement under the eSLR to a range of 3.5 to 4.5 per cent, down from the current 5 per cent, according to the people, who did not want to be identified discussing nonpublic information. The firms' banking subsidiaries would also likely see their requirement reduced to the same range, down from the current 6 per cent, the sources said.
The revisions resemble those from 2018, when US President Donald Trump's regulators sought to 'tailor' the eSLR calculation that applied to US global systemically important banks, according to the sources familiar with the matter. The sources said the proposal's language could still change.
The proposal will look to change the overall ratio rather than exclude specific assets such as Treasuries, as some observers had predicted. Still, it's expected to ask for public comment on whether the agencies should carve out Treasuries from the calculation, the sources said.
The Fed said on Tuesday that it plans to meet on Jun 25 to discuss the plan. The other regulators had not yet announced their agendas on the enhanced version of the supplementary leverage ratio (SLR).
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Representatives for the Fed, FDIC and OCC declined to comment.
Fed chair Jerome Powell and other officials supported possible revisions to the supplementary leverage ratio standards in a bid to bolster banks' roles as intermediaries in the market. In February, he told the House Financial Services Committee that he had been 'somewhat concerned about the levels of liquidity in the Treasury market' for a long time.
In April, Trump's tariffs rattled the markets, sharpening investors' focus on the SLR standards.
The industry has said the rule, which requires large lenders to hold capital against their investments in Treasuries, crimps their ability to add to those securities in times of volatility, as they are treated in line with much riskier assets. The SLR's applicability to Treasuries was suspended during the Covid-19 crisis, but it has since been reinstated.
Leverage ratios are intended to act as a 'backstop' to risk-based capital requirements, Michelle Bowman, the Fed's vice-chair for supervision, said earlier this month.
'When leverage ratios become the binding capital constraint at an excessive level, they can create market distortions,' she added.
Treasury Secretary Scott Bessent has pointed to estimates that tweaking the rule could reduce Treasury yields by tens of basis points.
Still, it's unclear whether easing the leverage ratio would encourage banks to buy more Treasuries, said Jeremy Kress, a former Fed bank policy attorney who now teaches business law at the University of Michigan.
'When regulators temporarily excluded Treasuries from the leverage ratio in 2020, most banks chose not to take advantage of this exclusion because doing so would have triggered restrictions on their ability to pay dividends and buy back shares,' Kress said. 'This experience suggests that if banks get additional balance sheet capacity from leverage ratio changes, they are more likely to use it for capital distributions to shareholders rather than for Treasury market intermediation.'
Graham Steele, another Fed alumnus who served as a Biden-era Treasury official, says there are more targeted solutions that could help the Treasury market issues.
'Unfortunately, the deregulation being contemplated won't remedy the situation; it will just make the financial system more fragile,' Steele said. BLOOMBERG
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