Highlights

The Federal Reserve has put forward a plan to relax key capital rules for major banks, hoping to alleviate operational constraints. This proposal aims to adjust the enhanced supplementary leverage ratio, initially designed after the financial crisis to maintain stability. However, some officials warn of potential risk to financial safeguards. The proposal is expected to reduce top-tier capital requirements by $13 billion, while subsidiaries will experience a greater reduction. This initiative seeks to improve Treasury market liquidity, though it faces opposition due to concerns over market stress resilience.

Sentiment Analysis

• The sentiment around the proposal is mixed, reflecting both optimism and concern.
• Supporters see potential for increased liquidity and flexibility for banks.
• Critics fear it may compromise financial safeguards and lead to riskier bank behavior.
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Article Text

The Federal Reserve has proposed a significant change to a crucial capital rule affecting large Wall Street banks, aiming to provide these institutions with more operational flexibility. This move, targeting the enhanced supplementary leverage ratio, addresses ongoing debates about balancing bank stability and market liquidity.

Fed Chair Jerome Powell highlighted the significant increase in low-risk assets on bank balance sheets over recent years. This accumulation necessitates reconsideration of the existing leverage ratio, which has become more restrictive than initially intended. The proposed changes are intended to lower the top-tier capital big banks are required to maintain by 1.4%, equivalent to about $13 billion, for holding companies. Subsidiaries would face a larger reduction of $210 billion, while aligning with the parent bank.

Support for the proposal comes from various Fed officials, including Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller. They argue that easing these regulations could enhance resilience in U.S. Treasury markets, thereby minimizing market dysfunction and reducing the necessity for Federal Reserve intervention during stress events.

Conversely, opposition arises from officials such as Governors Adriana Kugler and Michael Barr. They contend that the proposed changes might not significantly contribute to improving Treasury market operations during periods of tension. Instead, there are concerns that firms might distribute capital to shareholders rather than bolster Treasury intermediation, potentially leading to higher-risk endeavors.

This initiative is part of a broader effort to equate the treatment of low-risk inventory like Treasurys with high-yield bonds for capital requirements. With a 60-day public comment period ahead, the debate continues over whether this strategy will serve as a beneficial safety net or a restrictive element on bank activities.

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