NEW YORK CITY – The Federal Reserve has proposed easing a pivotal capital rule that Wall Street banks argue restricts their operational capacity. The proposal, however, has sparked dissent among Fed officials, raising concerns about the potential weakening of crucial financial safeguards.
Breaking: Fed’s Capital Rule Proposal
The Federal Reserve announced on Wednesday its intention to relax the enhanced supplementary leverage ratio, a measure implemented post-financial crisis to ensure the stability of the nation’s largest banks. This proposal marks a significant shift in regulatory approach, reflecting ongoing debates over bank reserves and Treasury market liquidity.
Immediate Impact
The proposed rule change has drawn mixed reactions within the Federal Reserve itself, with some officials warning it could undermine essential financial protections. The Fed’s decision to vote on the new capital guidelines is scheduled for 2 p.m. ET, underscoring the urgency and significance of this development.
Key Details Emerge
The draft measure aims to reduce the top-tier capital that major banks must hold by 1.4%, equating to approximately $13 billion for holding companies. Subsidiaries would experience a more substantial decrease, with $210 billion still retained by the parent bank. The new standard would apply uniformly to globally systemic important banks and their subsidiaries.
Fed Chair Jerome Powell stated, “This stark increase in the amount of relatively safe and low-risk assets on bank balance sheets over the past decade or so has resulted in the leverage ratio becoming more binding.”
Industry Response
Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller have expressed support for the changes, emphasizing the proposal’s potential to bolster U.S. Treasury markets and reduce the likelihood of market dysfunction.
“The proposal will help to build resilience in U.S. Treasury markets, reducing the likelihood of market dysfunction and the need for the Federal Reserve to intervene in a future stress event,” Bowman stated.
By the Numbers
- Top-tier capital reduction for holding companies: 1.4% or $13 billion
- Subsidiaries’ capital reduction: $210 billion
- New capital requirement range: 3.5% to 4.5%
What Comes Next
Despite support from some quarters, the proposal faces opposition from governors Adriana Kugler and Michael Barr, who argue the changes may not provide the intended benefits during times of financial stress.
“Even if some further Treasury market intermediation were to occur in normal times, this proposal is unlikely to help in times of stress,” Barr commented.
Background Context
The enhanced supplementary leverage ratio was originally introduced as part of a broader effort to prevent another financial crisis. However, as bank reserves have increased, there has been growing pressure from Wall Street executives and some Fed officials to reevaluate these requirements.
Expert Analysis
Financial analysts suggest that the proposed changes reflect a broader regulatory trend towards accommodating market dynamics without compromising financial stability. This move represents a significant shift from previous regulatory stances, potentially signaling new priorities for the Federal Reserve.
Regional Implications
The proposal’s impact on global banking standards is also noteworthy, as the new regulations align with Basel standards, which set international benchmarks for banks. This alignment may influence regulatory practices beyond U.S. borders.
Timeline of Events
- Post-Financial Crisis: Introduction of the enhanced supplementary leverage ratio
- Recent Years: Increased bank reserves and liquidity concerns
- Wednesday: Fed’s proposal to ease capital requirements
The Fed’s decision on this proposal will likely have far-reaching implications for both domestic and international banking practices. As the financial world awaits the outcome, the balance between regulatory oversight and market flexibility remains a central theme.