US plans to ease capital rule on banks’ Treasury trades – report

The U.S.’s three main bank regulators are expected to reduce an important capital buffer by up to 1.5 percentage points for the largest banks due to concerns that it can limit their trading in the $29T Treasuries market, according to a media report.

The Federal Deposit Insurance Corp., the Federal Reserve, and the Office of the Comptroller of the Currency are rethinking the enhanced supplementary leverage ratio, a rule that applies to the largest U.S. lenders, including JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), and Goldman Sachs (NYSE:GS), Bloomberg reported, citing people briefed on the discussions.

Under the proposal, a bank holding company’s capital requirement under the eSLR would be cut to a range of 3.5%-4.5%, compared with the current 5% requirement, the people said. The holding companies’ banking subsidiaries would also likely see the requirement lowered to the same range vs. the current 6%, they added.

In 2018, President Donald Trump’s bank regulators made a similar proposal in an effort to tailor the eSLR calculation that applies to U.S. global systemically important banks. The proposal’s language could still change, the people told Bloomberg.

The proposal is seeking to change the ratio itself, rather than exclude certain assets such as Treasuries, as some observers had suggested. The regulators are expected to seek public comment on whether they should exclude Treasuries from the calculation, the people said.

The Fed on Tuesday said it will meet on June 25 to discuss proposed revisions to the SLR, but gave no information on what the revisions would be.

In April, President Trump’s tariffs shook financial markets, which brought investor focus on the SLR requirements.

The industry contends that the rule, which requires that large lenders hold capital against their investments in Treasuries, hinders their ability to add to those holdings when markets are volatile.

Earlier this month, Michelle Bowman, the Fed’s new vice chair for supervision, pointed to the eSLR as an example of an over-calibrated rule. “When leverage ratios become the binding capital constraint at an excessive level, they can create market distortions,” she said.

Some, though, aren’t so sure the lower ratio will encourage the purchase of Treasuries when markets are volatile. “When regulators temporarily excluded Treasuries from the leverage ratio in 2020, most banks chose not to take advantage of this exclusion because doing so would have triggered restrictions on their ability to pay dividends and buy back shares,” Jeremy Kress, a former Fed bank-policy attorney, told Bloomberg.