On Wednesday, the US Federal Reserve (Fed) announced a proposal to reduce the capital reserve ratio that large banks must maintain, creating mixed reactions within the Fed's leadership.
The decision comes from Fed Chairman Jerome Powell, who believes the current rule—the enhanced supplementary leverage ratio (eSLR)—is too strict.
The proposed changes would significantly loosen a rule established after the 2008 financial crisis to prevent the risk of a banking system collapse, Powell testified before the Senate Banking Committee.
The eSLR was designed as a hard limit on the amount of high-quality capital that large banks must maintain, with the aim of protecting global finances from sudden shocks when banks become reckless. However, Powell asserted that the system is outdated.
“The massive buildup of safe, low-risk assets on balance sheets over the past decade has made leverage more restrictive,” he said. “Based on this experience, we need to reconsider our original approach.”
Fed plans to reduce capital reserves by tens of billions of dollars
The Fed has opened a 60-day public comment period on the proposal, which would reduce the capital requirement for bank holding companies to 1.4%, freeing up about $13 billion in capital. The reduction would be even steeper for bank subsidiaries, up to $210 billion, which would remain at the holding company level.
Currently, eSLR requires parent companies to maintain a capital ratio of 5%. The new draft would lower the ratio to between 3.5% and 4.5%. Subsidiaries, which are currently subject to a 6% threshold, would also be subject to the same ratio.
The move comes after years of pressure from Wall Street executives and Fed officials who say the current rules do not distinguish between low-risk and high-risk assets, with U.S. Treasury bonds considered safe but still treated as high-yield bonds under the current eSLR.
Rising bank reserves and concerns about liquidity in the Treasury market have prompted Powell and his colleagues to propose a more flexible regulatory framework.
Not everyone agrees, however. Two Fed governors, Adriana Kugler and Michael Barr, strongly oppose the proposal. Barr, who served as vice chairman for supervision, argues that lowering capital ratios would not help banks better support the financial crisis.
“While this would increase intermediation in the Treasury market under normal conditions, it is unlikely to be effective during times of stress,” he said. “Companies would likely use the freed-up capital to pay dividends or pursue the highest returns, rather than increase intermediation in the Treasury market.”
Two officials support, two strongly oppose
Supporters included Vice Chair of Supervision Michelle Bowman and Governor Christopher Waller, who said the proposal would help stabilize the Treasury market by allowing banks to hold more safe assets without penalty.
“This proposal would enhance the resilience of the U.S. Treasury market, reduce the risk of disruption, and limit the Fed’s ability to intervene in future stress events,” she said. “We need to proactively adjust to the unintended consequences of banking regulation, including the eSLR’s limitations, while ensuring financial safety and stability.”
Christopher also expressed agreement, agreeing that the current leverage ratio is becoming more of a constraint than a safeguard. The blanket approach to asset allocation is also seen as outdated, especially when applied to banks that hold large volumes of low-risk assets.
Adriana and Michael, on the other hand, worry that banks will not use the new capital for productive investments but instead will seek to maximize shareholder returns, a practice that post-crisis regulations have sought to prevent. Adriana has not issued a full statement, but she agrees with Michael’s concerns.
This isn’t the first time eSLR has come under pressure to be reformed. Big banks have repeatedly complained that the rule makes them reluctant to hold Treasurys, especially when demand is high. The Fed’s new draft seeks to overhaul the system by reclassifying the asset as low-risk.
The amendment also aims to bring the US regulatory framework closer to the global Basel standards, which help standardize banking practices internationally. The official document released today confirms that this alignment is one of the main drivers of the proposal.
Source: https://tintucbitcoin.com/fed-powell-noi-long-von-rui-ro-tien-so/
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