Federal Reserve Considers Lowering Bank Capital Requirements to 3.5-4.5% Amid Safety-Flexibility Balance

The Federal Reserve is weighing adjustments to capital requirements for major banks, signaling a potential shift in regulatory priorities. During a July 22 conference in Washington, D.C., Federal Reserve Chair Jerome Powell outlined discussions on recalibrating the capital framework for large institutions, emphasizing the need to balance safety with operational flexibility. The proposal includes lowering the enhanced Supplementary Leverage Ratio (eSLR) from the current 5% to a range of 3.5% to 4.5%, while allowing certain assets like U.S. Treasuries to be excluded from leverage calculations. This move could reshape how banks allocate capital and engage in market activities.

Vice Chair for Supervision Michelle W. Bowman highlighted the conference’s focus on evaluating the effectiveness of existing rules. “The conference will allow for expert discussions on whether capital requirements are operating as intended,” she stated, underscoring the Fed’s openness to revising frameworks to better align with evolving financial conditions. The adjustment to eSLR, approved on June 27, aims to address concerns about regulatory burdens while maintaining risk management standards. By excluding high-quality assets from leverage ratios, the Fed may incentivize banks to increase their holdings of U.S. Treasuries, potentially boosting liquidity in that market.

Elizabeth Warren, a prominent critic of financial deregulation, has raised alarms about the proposal’s implications. The senator warned that relaxing capital rules could prioritize shareholder returns over financial stability, risking a recurrence of pre-2008 crisis vulnerabilities. Her comments reflect broader debates about the trade-offs between regulatory rigor and institutional competitiveness. The Fed’s approach must navigate these tensions, ensuring that reforms do not undermine safeguards against systemic risks.

Industry observers note that the recalibration could impact global banking dynamics. Easing leverage constraints might reduce the competitive gap between traditional banks and non-bank financial entities, which often operate under different regulatory parameters. However, the Fed’s emphasis on maintaining capital buffers suggests a cautious approach, with any changes likely to be phased in gradually. The final framework will depend on stakeholder feedback and the central bank’s assessment of macroeconomic conditions.

Analysts stress that the proposed adjustments are not a full-scale deregulation but a recalibration. By allowing banks to optimize capital usage without compromising safety, the Fed aims to foster resilience while adapting to modern financial practices. Yet, the inclusion of U.S. Treasuries in the eSLR exemption raises questions about potential unintended consequences, such as concentrated risk exposures. The Fed’s ability to balance these factors will be critical in shaping the post-crisis regulatory landscape.

The outcome of this review could influence broader policy discussions. If implemented, the revised rules may prompt similar debates in other jurisdictions, particularly as global financial institutions seek to harmonize standards. For now, the Fed’s cautious stance reflects its dual mandate of maintaining stability while supporting economic growth. As the evaluation process unfolds, stakeholders will closely monitor how the central bank balances innovation with prudence in its regulatory approach.