Fed proposes easing capitalization requirements despite internal opposition

The Federal Reserve (Fed) announced a proposal to lower leverage ratios for major banks on Wednesday, drawing some criticism from Fed policymakers who intend to oppose the rule changes if and when they take place.

What are the eSLR requirements, and what do they do?

The enhanced Supplementary Leverage Ratio (eSLR) was adopted in 2014 as part of Basel III regulation overhauls to increase global banking stability following the 2007-2008 global financial crisis. Under the eSLR, banks that are designated as a Global Systemically Important Bank (GSIB) must maintain a 5% capital reserve relative to its total leverage, which includes assets that are typically considered safe, such as US Treasury bonds.

What are the proposed changes to the eSLR?

If the Fed goes ahead with its plan to revamp eSLR requirements, GSIBs can expect an overall reduction in their eSLR requirements from a flat 2% buffer to a bounded target equal to one-half of that bank's method 1 surcharge, which is overall expected to reduce capital-leverage requirements by 1.4% for GSIBs, and by 27% for GSIB subsidiary institutions.

What will the eSLR changes do?

Under the proposed adjustments to GSIB leverage ratios, the eSLR changes are expected to free up additional capital for major investment banks to invest in Treasury bonds. Granting additional investment allocation to GSIBs could help to shore up stability for the US Treasury market in times of economic turmoil.

Fed Board of Governors members Adriana Kugler and former Fed Vice Chair for Supervision Michael Barr are both expected to express dissent to the proposed changes in prepared statements.