U.S. Regulators Move To Ease Financial Crisis-Era Bank Capital Rules

Banks have long lobbied for lowering what’s known as the supplementary leverage ratio, and Treasury Secretary Bessent has said the change would help buttress global markets by allowing banks to buy more Treasurys.

The details

The Federal Reserve’s board voted 5-2 on Wednesday to issue a proposal to lower the enhanced supplementary leverage ratio. The enhanced ratio dictates how much capital big banks like JPMorgan Chase and Citigroup must hold against their total assets.

One of the opposing votes came from Fed governor Michael Barr, who served as the central bank’s top bank regulator before stepping down amid pressure from President Trump. Barr said in a statement the proposal would “significantly increase” the risk of a big bank failure.

The supplementary leverage ratio was originally meant to act as a backstop to rules that require banks to hold capital based on the riskiness of different assets.

“With the risk-based approach…there is a lot of room for flexibility—or to put it differently, manipulation,” said Mayra Rodríguez Valladares, a financial regulatory consultant at the MRV Associates.

The proposal would reduce the amount of core capital that big banks hold at the holding company level by an estimated $13 billion, and at the subsidiary level by an estimated $210 billion, according to Fed officials. That would give banks more flexibility about how they allocate capital across their subsidiaries.

The Office of the Comptroller of the Currency released a parallel proposal Wednesday. The Federal Deposit Insurance Corp. is expected to meet on the proposal Thursday.

The context

The move is part of a broader set of rollbacks the Trump administration is expected to undertake, including changes to how banks are rated, how they are examined by regulators for financial stability, and the annual stress tests the largest lenders must take.

The changes to bank capital rules in particular would strip away some of the “gold plating” U.S. banking rules—or the additional safeguards the U.S. placed on banks above what was required by international agreements.

Industry representatives say banks are unlikely to immediately buy more Treasurys as a result of leverage requirement changes, but that they would have more capacity to do so in times of stress.

The Fed’s proposal also asks banks to comment on possibly excluding Treasurys from the leverage ratio denominator for all banks. Banks and the public have 60 days to comment on the proposal. A final rule is expected later this year.

Officials have indicated they are also preparing to propose a set of risk-based capital requirements that the U.S. agreed to undertake as part of an international Basel III agreement following the financial crisis. After intense industry pushback, the Fed had to pull back on a prior Basel proposal during the Biden administration.

Write to Dylan Tokar at dylan.tokar@wsj.com