The US Federal Reserve, Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency are preparing to lower the Supplementary Leverage Ratio (eSLR) for the largest banks in the country.
Changes in Leverage Ratios
According to sources, the proposed changes could cut the capital requirement for bank holding companies from the current 5% to a range of 3.5% to 4.5%. Subsidiary banks would likely also see their threshold lowered from 6% to match the same range. These changes result from concerns that the current capital requirement limits their ability to trade in the $29 trillion Treasury market.
Banks' Reactions to New Rules
The new rules apply to major US banks such as JPMorgan Chase & Co., Goldman Sachs Group Inc., and Morgan Stanley. Fed Chairman Jerome Powell backed changes to leverage ratio standards, emphasizing the need to support liquidity in the market. In February, he expressed concern about the liquidity levels in the Treasury market.
Expert Evaluations
Experts have differing opinions on the proposed changes. Michelle Bowman, the Fed's vice chair for supervision, noted that strict leverage ratios can create market imbalances. However, some analysts, like Jeremy Kress, doubt that easing this ratio will lead banks to purchase more Treasuries. He pointed out that when Treasuries were temporarily excluded from the ratio in 2020, most banks did not take advantage of this option.
The proposed changes to leverage ratios continue to spark debate among experts and market participants. The next step will likely involve public hearings where regulators can gather feedback on the new policy.
