Fed Votes to Advance Proposal to Ease Banks' Capital Requirements

Core Viewpoint - The Federal Reserve has voted to advance a proposal that would ease the "enhanced supplementary leverage ratio," impacting the capital banks must hold against low-risk assets [1][2]. Group 1: Proposal Details - The Fed board voted 5-2 to advance the proposal, which will now be open for public comment for 60 days [2]. - Under the proposed reform, the capital banks must set aside will depend on their role in the global financial system, equaling half of their "GSIB surcharge" [3]. - Currently, banks are required to hold a flat percentage of capital against all assets, treating lower-risk assets similarly to high-yield ones, which penalizes banks for holding Treasuries [4]. Group 2: Background and Rationale - The current requirement was established after the 2008 financial crisis and has been increased over the years, with banks arguing it restricts their ability to trade in lower-risk assets like Treasury bonds [5]. - Fed officials supporting the change believe the current requirement discourages large banks from facilitating trading in the Treasury market [5]. - Fed Chairman Jerome Powell stated it was "prudent" to reconsider the rule, while some governors oppose the changes, citing concerns over the size of the capital requirement decrease [6]. Group 3: Industry Response - The banking industry has lobbied for reform, claiming the current rule limits their ability to extend credit and participate in the government debt market [7]. - Critics argue that recent market volatility makes it an inappropriate time to roll back capital requirements [7].