U.S. authorities are preparing to announce one of the biggest cuts in bank capital requirements in more than a decade, the latest sign of the Trump administration’s deregulation agenda.
In the coming months, regulators are ready to reduce the proportion of supplemental leverage, according to several people familiar with the matter.
The rule requires large banks to have a preset amount of high-quality capital, including their total leverage, which includes loans and assets such as asset-list exposure, such as derivatives. It was founded in 2014 and is part of a comprehensive reform following the 2008-09 financial crisis.
Bank lobbyists have been opposing the rule for years, saying it punishes lenders for even holding low-risk assets, such as U.S. Treasuries, which hinders their ability to facilitate transactions in the $29TN government debt market and undermines their ability to expand credibility.
"The penalties for banks to hold low-risk assets, such as Treasuries, undermine their ability to support market liquidity during the most needed pressure," said Greg Baer, CEO of Lobby Group, a banking policy institute. "Regulators should act now, rather than waiting for the next event."
Lobbyists want regulators to make recommendations for reforms in the summer. Relaxation of capital rules as the Trump administration is cutting down on everything from environmental policies to financial disclosure requirements.
However, critics say it is a worrying time to cut bank capital requirements given the recent market volatility and policy turmoil under President Donald Trump’s administration.
"Given the situation of the world, there are various risks - including the dollar role and economic direction of banks in the United States - it doesn't sound like the right time to relax capital standards at all," said Nicolas Véron, a senior researcher at the Peterson Institute for International Economics.
Analysts say the move to turn back the SLR will be a boon for the fiscal market, which could help Trump achieve his goal of reducing borrowing costs by allowing banks to buy more government debt.
This will also encourage banks to play a greater role in the industry as a result of regulations laid out in the wake of the financial crisis after the industry ceded its foundation to high-frequency traders and hedge funds.
Leading U.S. policymakers expressed support for relaxing SLR rules.
Treasury Secretary Scott Bessent said last week that the reform was a "focus" for major banking regulators (the Federal Reserve, the Office of the Currency Auditor General and the Office of the Federal Deposit Insurance Company).
"We need to study the treasury market structure, and part of the answer may be, I think the calibration of the supplemental leverage ratio will be lowered," Fed Chairman Jay Powell said in February.
Currently, the eight largest banks need to own what are called Tier 1 capital - common equity, retained earnings and other items that absorb losses first - at least 5% of their total leverage.
The largest banks in Europe, China, Canada and Japan have lower standards, with capital most needed between 3.5% and 4.25% of their total assets.
Bank lobbyists hope the U.S. will propose its leverage ratio requirements based on international standards.
Another option that regulators consider is to exclude low-risk assets from leverage calculations, such as leverage calculations, as happens temporarily during the pandemic. Analysts at Autonomous recently estimated that reintroduction of such exemptions would easily release about $200 million for the balance sheet of the U.S. big lenders.
But this will make the United States an international outlier in Europe and concerns that it could prompt lenders to push similar capital relief for euro zone sovereign debt and UK gilded holdings.
Most large U.S. banks are subject to other rules such as the Fed's stress test and risk-adjusted capital requirements, which may limit how much they benefit from the SLR reform. Morgan Stanley analysts recently estimated that only State Street is truly “limited” by SLR.
“Understanding U.S. rules with international standards will provide larger banks with more capital net-out rather than exempting treasury and central bank deposits, from supplemental leverage calculations,” said Sean Campbell, chief economist at the Financial Services Forum Hall Group, which represents the eight U.S. banks.
The Fed, OCC and FDIC declined to comment.