In a move aimed at enhancing liquidity in the $29 trillion U.S. Treasury market, U.S. regulators are planning to ease a key capital requirement that has long constrained large banks’ trading activity.
The Federal Reserve, Federal Deposit Insurance Corporation, and Office of the Comptroller of the Currency are reportedly considering a proposal to lower the enhanced supplementary leverage ratio (SLR) by up to 1.5 percentage points for the largest U.S. banks, including JPMorgan Chase JPM, Goldman Sachs GS, Morgan Stanley MS, and Wells Fargo WFC.
Details of the Proposed Capital Rule Adjustment for Banks
Currently, all U.S. banks are obligated to hold capital equal to at least 3% of their total exposures, including assets and off-balance sheet items like derivatives. The largest global banks are required to maintain an additional 2%, bringing their minimum leverage ratio to 5%.
The proposal would reduce the capital requirement under the SLR for bank holding companies from 5% to a range of 3.5% to 4.5%, while subsidiaries could see their threshold drop from 6% to the same range.
How Easing Capital Rule Impact Banks?
Fed Chair Jerome Powell has raised concerns that strict capital rules may limit banks from holding Treasuries, particularly during times of volatility. Under the current framework, Treasuries are treated in the same category as higher-risk assets, which can reduce incentives for banks to trade or hold them.
Michelle Bowman, the Fed’s vice chair for supervision, earlier this month, stated that leverage rules are meant to support capital strength. However, when these ratios are set too high, they may limit market activity and reduce liquidity.
A proposed easing of these capital requirements could benefit major banks such as JPMorgan Chase, Goldman Sachs, Morgan Stanley, and Wells Fargo by reducing the amount of capital they must hold in reserve. This would give them more flexibility to expand operations, particularly in lending and Treasury trading.
In addition, lower capital buffers could enhance bank profitability by freeing up funds for investment and business growth. However, the overall effectiveness of the changes will depend on how banks respond and whether regulators introduce further reforms.
Currently, JPMorgan, Morgan Stanley, and Wells Fargo carry a Zacks Rank #3 (Hold), while Goldman Sachs has a Zacks Rank #4 (Sell).
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The Goldman Sachs Group, Inc. (GS): Free Stock Analysis Report Wells Fargo & Company (WFC): Free Stock Analysis Report JPMorgan Chase & Co. (JPM): Free Stock Analysis Report Morgan Stanley (MS): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).
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