U.S. Regulators Propose 1.5% to 2.5% Cut in Key Bank Capital Ratio

Three major U.S. financial regulatory bodies have jointly proposed a plan to lower the enhanced supplementary leverage ratio (eSLR) requirements for the largest systemically important banks in the country. This move marks a significant step in the deregulatory path initiated under the Trump administration, sparking intense debate among market participants and regulatory officials.

The Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC) have proposed adjusting the current eSLR standards for bank holding companies from 5% to a range of 3.5% to 4.25%, and for depository institutions from 6% to the same range. This ratio measures the proportion of a bank's Tier 1 capital to its total leverage exposure, serving as a crucial indicator of a bank's ability to absorb potential losses.

If implemented, the new regulation would allow major banks, including JPMorgan Chase and Goldman Sachs, to release hundreds of billions of dollars in capital. Currently, large banks hold approximately 166 billion dollars in excess Tier 1 capital under the existing leverage ratio regulations. The proposal, if implemented, could release between 54 billion and 185 billion dollars in capital.

While this relaxation is seen as a significant benefit for large banks, it has not garnered unanimous support within the Federal Reserve. Federal Reserve Chair Jerome Powell acknowledged the necessity of reviewing the eSLR in light of changes in market structure since the financial crisis. Newly appointed Federal Reserve Vice Chair for Supervision Michael Barr expressed support, stating that the proposal represents a first step in balancing financial system stability with the resilience of the Treasury market.

However, former Vice Chair for Supervision and current Governor Lael Brainard, along with Governor Christopher Waller, have voiced opposition. They argue that the move could weaken the risk-resilience of systemically important banks. Notably, the proposal does not exclude U.S. Treasuries from the eSLR calculation, a long-standing request from major banks aiming to reduce capital usage.

The American Bankers Association has continued to advocate for further leverage ratio reforms, including the exclusion of U.S. Treasuries from the supplementary leverage ratio and Tier 1 leverage ratio calculations. The proposal is now open for a 60-day public comment period, with the FDIC scheduled to hold a meeting on the matter, potentially advancing regulatory easing. The OCC's acting Comptroller, appointed by the Trump administration, has also expressed support for the proposal.