(Bloomberg) — US regulators moved to relax capital requirements that lenders have said limit their ability to act as intermediaries in the Treasuries market during times of stress.
Officials from the Federal Deposit Insurance Corp., Federal Reserve and the Office of the Comptroller of the Currency finalized a plan to ease what’s known as the enhanced supplementary leverage ratio. The measure would see the largest US lenders like Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc. hold less capital relative to total assets.
The revisions would reduce holding companies’ capital requirement under the ratio to a range that is “substantially equivalent” to the June plan, FDIC Acting Chair Travis Hill said on Tuesday. Their banking subsidiaries would see that requirement lowered to a range of 3-4% under the final rule, according to an agency official.
Bank stocks climbed after the FDIC initially issued changes earlier Tuesday to leverage ratios resulting in lower capital requirements.
The adoption of the measure is a win for Wall Street banking giants, as officials look to soften several capital measures established in the wake of the 2008 global financial crisis. The final rule does not specifically exclude Treasuries from the revised ratio calculation, despite some big banks pushing for a carve out after President Donald Trump’s tariff announcements rattled the market earlier this year.
Fed Governor Stephen Miran supported that carve out and said regulators missed an “opportunity to make a more lasting” change by not excluding those assets and US central bank reserves.
FDIC staff estimates that the rule would result in a total requirement that is below the level of the risk-based tier 1 capital requirement for most major banks.
Although the capital requirements of subsidiaries would decline under the final rule, the requirements applicable to their parent holding companies would remain near their present level, the FDIC staff said in a memo. Staff also estimated that the aggregate reduction in tier 1 capital requirement for global systemically important banks would be $13 billion while the subsidiaries would expect to see a reduction of about $219 billion.
“The final rule also includes conforming changes to other regulations that are tied to the leverage capital standards, such as the total loss-absorbing capacity and long-term debt requirement,” the agencies said in a joint statement.
The leverage ratio is a part of a broader set of requirements under the Basel III reforms agreed to by global regulators in a bid to maintain the stability of the financial system. The measure, which went into effect in 2018 and treats all assets equally, is meant to serve as a backstop to other capital rules that give different loans and bonds varied weightings based on their perceived risk.
Some proponents have said the leverage ratio has become more restrictive for banks than risk-based capital rules, while critics of changing the standard questioned whether banks will actually use the increased flexibility to buy Treasuries.
“Today’s decision empowers the nation’s largest banks to support critical financial markets and provide essential lending, while maintaining strength and resilience,” Amanda Eversole, head of the Financial Services Forum, said in a statement.
Fed Governors Lisa Cook and Michael Barr opposed the final plan, saying it would unnecessarily and significantly reduce bank-level capital requirements.
“A series of well-intended, individually reasonable actions can nevertheless result in disproportionately large reductions in overall capital that can reduce the resilience of the system,” Cook said in a statement.
–With assistance from Felice Maranz.
(Adds Federal Reserve details beginning in second paragraph.)
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