The Federal Reserve has released a proposal to reduce the capital buffer required for big banks, sparking discussions within the agency.
Fed Proposal and Its Consequences
On Wednesday, Fed Chair Jerome Powell presented a proposal to reduce the capital buffer for large banks, arguing that the current rule — the enhanced supplementary leverage ratio (eSLR) — has become too restrictive.
The proposed changes would lower capital requirements for bank holding companies by 1.4%, freeing up about $13 billion, while bank subsidiaries would see a larger reduction of $210 billion. This change addresses long-standing pressures from the financial sector to ease the burden on banks.
Opposition Within the Fed
Despite support for the changes, two Fed governors — Adriana Kugler and Michael Barr — have voiced opposition to the proposal. Michael noted that the reduction in capital would not make banks more helpful during financial crunches.
He stated, "Even if some further Treasury market intermediation were to occur in normal times, this proposal is unlikely to help in times of stress."
Reactions to the Changes
Supporters of the changes, such as Michelle Bowman and Christopher Waller, have indicated that lowering capital requirements could help stabilize the Treasury market. Michelle argued that the adjustments could reduce the likelihood of market dysfunction.
Critics like Adriana and Michael worry that the freed-up capital might be used for increasing shareholder returns rather than maintaining economic stability.
The Fed's proposal to reduce the capital buffer for banks has sparked mixed opinions among board members, highlighting the complexities of regulating the financial system amid current economic realities.
