U.S. Regulators Prepare to Ease Bank Capital Requirements by 20%

U.S. regulatory authorities are reportedly preparing to reduce the supplementary leverage ratio (SLR) for banks, marking one of the most significant reductions in bank capital requirements in over a decade. The SLR is a regulation that mandates large U.S. banks to maintain an additional layer of capital to absorb losses. This potential adjustment comes at a time when the U.S. Treasury Department is expected to issue a substantial amount of debt.

The reduction in SLR could lead to a decrease in the amount of cash that banks are required to hold in reserve, freeing up more capital for lending and other activities. This move is anticipated to encourage banks to play a more active role in the U.S. Treasury market, potentially increasing liquidity in the bond market. The regulatory shift is seen as a response to recent volatility in the U.S. Treasury market, with banks hoping for a change in the reserve requirements for typically safe investments.

The U.S. regulatory bodies have previously hinted at the need to reconsider the SLR, exploring adjustments to the formula to alleviate the burden on large banks or provide relief for highly secure investments like U.S. Treasuries. This potential change aligns with the broader regulatory easing agenda under the current administration, which has been working to reduce the compliance costs for financial institutions. The move, however, raises concerns among European regulators who worry that it could lead to demands for similar capital benefits for eurozone sovereign debt and UK gilts, potentially causing a divergence from international standards.

The SLR was introduced in 2014 as part of the comprehensive reforms following the 2008 global financial crisis. U.S. banks have long lobbied for a relaxation of this regulation, arguing that it penalizes institutions holding low-risk assets such as U.S. government bonds. They contend that the SLR hampers their ability to trade in the U.S. Treasury market and weakens their lending capacity. Lobbyists expect the regulatory authorities to propose reforms before the end of the summer. If the SLR is eased, U.S. banks could potentially purchase more government bonds, helping to achieve the administration's goal of increasing market liquidity and lowering borrowing costs.

The decision to relax the SLR lies with key regulatory bodies, including the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. According to the U.S. Treasury Secretary, this reform is a high-priority item for these regulatory bodies. Federal Reserve Chairman Jerome Powell had previously indicated the need to study the structure of the U.S. Treasury market, with reducing the SLR being one of the options under consideration.

Another proposal involves excluding low-risk assets like U.S. government bonds from the leverage ratio calculation, indirectly reducing the capital requirements for U.S. banks. This change could potentially release approximately 200 billion in liquidity from large U.S. banks. However, lobbyists argue that given the stricter capital adequacy regulations in other countries, directly relaxing the SLR would be more effective for U.S. banks.

Critics, however, view this potential move as a desperate measure. The non-profit organization Better Markets stated that U.S. policymakers should not lower the SLR to fulfill Wall Street's wishes. They argue that reducing the SLR will not encourage banks to provide more liquidity to the U.S. Treasury market and may instead lead banks to seek more government assistance during times of stress. Nicolas Véron, a senior researcher at the Peterson Institute for International Economics, also expressed concerns, noting that given the global situation and the potential for an economic recession in the U.S., this may not be the optimal time to relax U.S. banking capital standards.