The Federal Reserve unveiled a proposal to ease the enhanced Supplementary Leverage Ratio (SLR) to reduce capital requirements significantly for the major U.S. banks, including JPMorgan Chase & Co. JPM, Bank of America BAC, Goldman Sachs GS, and Morgan Stanley MS.
The proposal could make it easier for these banks to handle low-risk assets like the U.S. Treasurys and free billions in capital currently tied up due to post-2008 leverage requirements.
Details of the Proposed Plan by Fed
The Fed proposal would lower capital requirements for Global Systemically Important (GSIBs) banks such as JPM, BAC, GS and MS by 1.4%, or $13 billion. More substantially, it would reduce capital requirements for depository institution subsidiaries of banks by 27% or $213 billion.
Under the new proposed rule, the Fed would replace the current 2% enhanced SLR buffer with a buffer equal to half of each bank’s GSIB surcharge. Similarly, the 3% ESLR buffer for global bank subsidiaries would be replaced with half of each bank’s GSIB surcharge.
Michelle Bowman, Fed Vice Chair for Supervision, stated, "This proposal takes a first step toward what I view as long overdue follow-up to review and reform what have become distorted capital requirements."
How do Reduced Capital Requirements Impact Banks?
The easing of these requirements could directly benefit major banks such as JPMorgan, Goldman and Morgan Stanley by reducing the amount of capital they must hold in reserve. This will likely give them more flexibility to expand operations, particularly in lending and Treasury trading.
In addition, the proposed plan could help banks to support Treasury trading during times of market stress, while still maintaining adequate capital to ensure financial stability.
Additionally, lower capital buffers could enhance bank profitability by freeing funds for investment or business expansion. However, the overall effectiveness of the changes will depend on how the banks respond and whether regulators introduce further reforms.
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