The Federal Reserve has proposed a significant adjustment to the enhanced supplementary leverage ratio (eSLR), a key capital requirement for large U.S. banks. This move is expected to free up substantial capital and balance sheet capacity for major financial institutions.
📊 Key Details of the Proposal
Capital Relief: The proposed changes could release up to $185 billion in capital for large U.S. banks, as estimated by Morgan Stanley. Additionally, it may unlock approximately $6 trillion in balance sheet capacity for these institutions. reuters.com+1sg.finance.yahoo.com+1
Regulatory Adjustments: The plan involves recalibrating capital requirements to better align with each bank's systemic importance, rather than applying a flat percentage rule. This approach aims to reduce constraints on banks, particularly concerning low-risk assets like U.S. Treasurys.
Implementation Timeline: The proposal has been approved by a 5-2 vote by the Federal Reserve Board. A 60-day public comment period is now open before the final rule is potentially enacted later in 2025. wsj.com+3reuters.com+3reuters.com+3wsj.com
🏦 Implications for Major Banks
The proposed changes are particularly beneficial for the eight U.S. global systemically important banks (GSIBs):tipranks.com
JPMorgan Chase & Co. (JPM)
Bank of America Corp. (BAC)
Citigroup Inc. (C)
Goldman Sachs Group Inc. (GS)
Morgan Stanley (MS)
Wells Fargo & Co. (WFC)
Bank of New York Mellon Corp. (BK)
State Street Corp. (STT)
These institutions stand to gain increased flexibility in capital allocation, potentially enhancing their ability to engage in Treasury market activities and other low-risk investments.
⚠️ Considerations and Criticisms
While the proposal is welcomed by many in the banking sector, it has faced criticism from some Federal Reserve officials. Fed Governors Michael Barr and Adriana Kugler have expressed concerns that reducing capital buffers could increase the risk of bank failures, particularly during periods of financial stress.
📈 Market Reactions
Following the announcement, shares of major banks have experienced positive movements, reflecting investor optimism about the potential benefits of the proposed regulatory changes.
In summary, the Federal Reserve's proposed adjustments to the eSLR represent a significant shift in banking regulation, offering substantial capital relief to major U.S. banks. While the changes are expected to enhance banks' participation in Treasury markets and other low-risk investments, they also raise important questions about financial stability and risk management.
