Fed Votes to Advance Proposal to Ease Banks’ Capital Requirements

The Federal Reserve reportedly voted Wednesday (June 25) to advance a proposal that would ease the “enhanced supplementary leverage ratio” that determines the amount of capital banks must hold against relatively low-risk assets.

The Fed board voted 5-2 to advance the proposal, Reuters reported Wednesday.

The board’s vote means that the proposal will now be open for public comment for 60 days, CNBC reported Wednesday.

Under the proposed reform, the amount of capital that banks must set aside will depend on the size of the role they play in the global financial system, equaling half of their “GSIB surcharge,” according to the Reuters report.

Currently, banks are required to hold a flat percentage of capital in reserve against all assets, per the report. The CNBC report said that for this purpose, lower-risk assets are treated essentially the same as high-yield ones, and banks are practically penalized for holding Treasuries.

The current requirement was put in place after the 2008 financial crisis, increased over the years, and has for years been the target of banks that argue that it unnecessarily restricts their ability to facilitate trading in lower-risk assets, such as Treasury bonds, the Reuters report said.

Fed officials who support the change said the current requirement discourages large banks from facilitating trading in the Treasury market, according to the report.

Fed Chairman Jerome Powell said it was “prudent” to reconsider the rule, per the report.

The two Fed governors who indicated that they plan to oppose the changes said that the decrease in capital requirements was too sizeable and that they were skeptical that the reform would encourage bank activities in Treasury markets, according to the report.

It was reported in May that proposed cuts to banks’ capital requirements would be the largest in more than a decade.

The banking industry has lobbied for reform for years, arguing that the current rule lessens their ability to extend credit, penalizes lenders for holding lower-risk assets and curbs their ability to participate in the government debt market.

Critics counter that recent market volatility and policy upheavals make this a bad time to roll back capital requirements.

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