U.S. regulators plan to relax capital requirements for large banks, potentially freeing up hundreds of billions of dollars in capital space
The three major financial regulatory agencies in the United States plan to lower the "Enhanced Supplementary Leverage Ratio" (eSLR) requirements for large systemically important banks from the current range of 5% and 6% to a range of 3.5% to 4.25%. This move could free up tens of billions of dollars in capital space, although there are internal disagreements within the Federal Reserve. The new regulations are expected to benefit large banks such as JPMorgan Chase and Goldman Sachs, but do not meet the demands of some banks to exclude U.S. Treasury bonds
According to Zhitong Finance APP, the three major U.S. financial regulatory agencies jointly proposed on Wednesday to lower the "Enhanced Supplementary Leverage Ratio" (eSLR) requirements for the largest systemically important banks in the U.S. This move marks a key step in the deregulation path led by Trump, sparking intense discussions among the market and regulatory officials.
The Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) jointly proposed to adjust the current 5% eSLR standard for bank holding companies and the 6% standard for deposit-taking institutions to a floating range of 3.5% to 4.25% based on risk conditions.
This ratio measures the proportion of a bank's Tier 1 capital to its total leverage exposure and is an important indicator for assessing a bank's ability to absorb potential losses. Once the new regulations are implemented, large banks, including JPMorgan Chase (JPM.US) and Goldman Sachs (GS.US), will be allowed to release hundreds of billions of dollars in capital space.
Morgan Stanley analyst Betsy Graseck estimates that large banks currently have about $166 billion in excess Tier 1 capital under the existing leverage ratio regulations. If the new regulations are enacted, it could release between $54 billion and $185 billion in capital.
Although this easing measure constitutes a significant benefit for large banks, there is no consensus within the Federal Reserve. Federal Reserve Chairman Jerome Powell stated in a statement that reviewing the eSLR is "necessary" given the changes in market structure since the financial crisis.
Newly appointed Federal Reserve Vice Chair for Supervision Michael Barr also expressed support, calling it a "first step in balancing the stability of the financial system with the resilience of the Treasury market."
However, former Vice Chair for Supervision and current Board Member Randal Quarles explicitly opposed the move, stating that it would weaken the risk resilience of systemically important banks. He and another Federal Reserve Board member, Michelle Bowman, both voted against it.
It is noteworthy that this proposal did not, as some banks wished, exclude U.S. Treasury securities from the eSLR calculation. Large banks, including JPMorgan Chase, have long called for the exclusion of Treasury assets to reduce capital requirements.
In response, Rob Nichols, CEO of the American Bankers Association, continued to call for "further leverage ratio reforms, including the exclusion of U.S. Treasury securities from the supplementary leverage ratio and the Tier 1 leverage ratio calculations."
The proposal has opened a 60-day public comment period, and the FDIC plans to hold a meeting on Thursday to further promote regulatory easing. OCC Acting Comptroller Rodney Hood, appointed by the Trump administration, has expressed support
