The Federal Reserve's recent meeting proposed a $13 billion reduction in capital requirements for the largest banks in the United States, leading to disagreements among board members.
Capital Requirement Changes
The proposed rule targets the enhanced supplementary leverage ratio, governing how much high-quality capital banks must maintain relative to their total assets. Fed Chair Jerome Powell defended the changes, citing a "stark increase" in low-risk assets over the last decade. The new standards would see bank holding companies' required capital levels drop by 1.4%, while their subsidiaries face a much larger reduction of $210 billion.
Support and Opposition to the Proposal
Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller supported the proposal, claiming it would strengthen Treasury market function. In contrast, Governors Adriana Kugler and Michael Barr expressed strong opposition, questioning the proposal's ability to achieve its stated objectives.
Regulatory Alignment and Market Concerns
The proposal aligns with Basel international banking standards, establishing global frameworks for bank capital requirements and risk management practices. Current systems treat government bonds similarly to high-yield corporate debt, raising concerns about asset risk and liquidity.
The Federal Reserve's approach to capital requirements reflects broader tensions between concerns of financial stability and market functionality goals. The 60-day comment period is likely to generate significant input from banking representatives and financial stability advocates before final decisions are made.
