Federal Reserve Eases Capital Rules to Aid Treasury Market

Prime Highlights

Federal Reserve suggests reducing megabank capital requirements.
The action would release up to $210 billion of capital to back U.S. Treasury markets.

Key Facts

The raised eSLR would fall from 5% to 3.5% to 4.5%.
Final rulemaking will be followed by a 60-day comment period.

Key Background

The Federal Reserve released a new proposal to lower the enhanced supplementary leverage ratio (eSLR), one of the post-2008 financial crisis capital standards placed on systemically important U.S. banks. The proposal, released simultaneously with the Office of the Comptroller of the Currency (OCC), is designed to reduce the eSLR for bank holding companies and their bank subsidiaries. Particularly, the level would decrease from the present 5% to between 3.5% and 4.5% for holding companies, while subsidiaries would also have their rates fall from 6%.

This realignment will free $210 billion of investable capital at the subsidiary level and about $13 billion at the holding-company level. The goal is to improve banks’ capacity to invest in the U.S. Treasury market—particularly during periods of financial stress—thereby underpinning the stability and liquidity of the financial system as a whole.

The bill’s supporters claim it moves the U.S. closer to compliance with global Basel III regulations and eliminates an artificial capital constraint that prevents banks from participating more in the markets. The big banks like JPMorgan Chase, Bank of America, and Goldman Sachs stand to gain relief from the bill, possibly leading them to hold more U.S. Treasuries, an important condition amid growing government debt size.

But the proposal has been criticized by other policymakers as well as financial regulators who oppose easing capital buffers, claiming that this will create systemic risk. They believe that at stressed market moments, the banking system will be more susceptible to shock with reduced need for leverage. Former regulators have pointed out that solidity of capital was a central buffer in the COVID banking crisis.

The proposal cleared the Fed Board 5–2, indicating the split over regulatory relief. The proposal now goes into a 60-day public comment period, in which regulators will consider comments and could adopt the rule by the end of the year.