The "Trump - Bauman" combination stirs up a trend for the Federal Reserve to relax regulations, and Wall Street giants welcome capital loosening

According to the Zhitong Finance APP, the Federal Reserve will consider plans to relax leverage requirements for large banks later this month, marking the beginning of a broad review of banking regulatory rules. The Federal Reserve announced in a statement that the Federal Reserve Policy Committee will hold a regulatory policy meeting on June 25 to discuss amendments to the so-called "Supplementary Leverage Ratio" (SLR), which requires commercial banks to maintain a capital ratio for their assets regardless of asset risk.

It is understood that this meeting will be the first regulatory policy meeting held after Michelle Bowman, a Federal Reserve governor, was confirmed as the highest-level regulatory official of the Federal Reserve. Bowman is a Republican regulatory official nominated by former President Donald Trump. Bowman tends to favor a loose stance on both monetary and regulatory policies, which is why Wall Street financial giants generally believe that Trump's nominee Bowman will push for significant relaxation of the Federal Reserve's overly stringent regulatory standards on Wall Street.

According to media reports, Bowman has drafted an ambitious plan to comprehensively reform the Federal Reserve's regulatory and monitoring approach for the largest and most complex commercial banks in the United States.

The Federal Reserve did not disclose any details of the proposed reform plan in its statement, but the U.S. banking industry has long called for adjustments to the Supplementary Leverage Ratio, such as exempting traditional safe assets or modifying the calculation formula.

The U.S. banking industry generally believes that the original intention of the Supplementary Leverage Ratio was to serve as a "bottom line" requirement, requiring capital to be set aside even for extremely safe assets. However, over time, this metric has become a "hard constraint" limiting the lending activities of Wall Street financial giants and may significantly weaken the ability of major banks to provide substantial liquidity in the U.S. Treasury market during periods of market liquidity pressure.

Ahead of the Federal Reserve's June 25 meeting, market focus has remained on whether the Supplementary Leverage Ratio (SLR) will be relaxed, given Trump's long-standing advocacy for "regulatory relaxation" and the fact that the Federal Reserve's highest-level regulatory official, Bowman, also leans towards loosening regulations.

The SLR is the U.S. version of the Basel III leverage ratio, requiring large banks to cover all on-balance-sheet and off-balance-sheet assets with a fixed proportion of common equity Tier 1 capital, even for reserves or U.S. Treasuries. Unlike risk-weighted capital ratios, the SLR does not consider asset risk weights, and Treasury securities, reserves, and repurchase agreements are all included in the denominator. Wall Street has long complained that this "one-size-fits-all" bottom line has evolved from an initial safety buffer into a "rigid constraint" limiting lending activities, Treasury market making, and repurchase transactions.

If regulators completely exempt ultra-safe assets such as U.S. Treasuries or lower the thresholds, it would immediately release hundreds of billions of dollars in capital, allowing giants like JPMorgan, Citigroup, and Morgan Stanley to expand their balance sheets, increase shareholder returns, and enhance liquidity in the U.S. Treasury market. The easing of capital constraints would significantly boost the ROE of Wall Street financial giants and create room for stock buybacks and dividends, benefiting investment bank-oriented firms like Goldman Sachs and Morgan Stanley even more. Additionally, a more relaxed SLR would encourage Wall Street financial giants to hold and actively make markets in Treasuries and participate in liquidity repurchases, thereby buffering liquidity vacuums during market turbulence The newly appointed head of the Federal Reserve's regulatory department, Bowman (nominated by Trump), is seen as a key proponent of relaxing the Federal Reserve's capital rules; the adjustment of the SLR may be the beginning of a series of "deregulation" measures, including reducing the expensive additional fees for the eight global systemically important banks (G-SIB) in the U.S., streamlining stress tests, and differentiated regulation for small and medium-sized banks