US Regulators Mull Easing Banks' Capital Rule on Treasury Trades

Core Viewpoint - U.S. regulators are planning to ease capital requirements for large banks to enhance liquidity in the $29 trillion U.S. Treasury market [1][9] Proposed Capital Rule Adjustment - The Federal Reserve, FDIC, and OCC are considering lowering the enhanced supplementary leverage ratio (SLR) by up to 1.5 percentage points for major banks like JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Wells Fargo [2][9] - Current capital requirements mandate U.S. banks to hold at least 3% of total exposures, with the largest banks needing an additional 2%, resulting in a minimum leverage ratio of 5% [3] - The proposed adjustment would reduce the SLR for bank holding companies from 5% to a range of 3.5% to 4.5%, while subsidiaries could see their threshold drop from 6% to the same range [4] Impact on Banks - Fed Chair Jerome Powell expressed concerns that strict capital rules may hinder banks from holding Treasuries, especially during volatile periods, as Treasuries are treated similarly to higher-risk assets [5] - Michelle Bowman, the Fed's vice chair for supervision, noted that excessively high leverage ratios could limit market activity and reduce liquidity [6] - Easing capital requirements could provide major banks with more flexibility to expand operations, particularly in lending and Treasury trading, potentially enhancing profitability by freeing up funds for investment and growth [7][8]