Trump Poised To Relax Key Bank Capital Buffer

US regulators are preparing to slash a central plank of post-crisis banking regulation, handing Wall Street its biggest reprieve in capital requirements for more than a decade and underscoring the Trump administration’s broader deregulation drive.

People briefed on the plans say the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation aim to unveil proposals within months to trim the supplementary leverage ratio (SLR), the rule that forces the nation’s largest lenders to hold a fixed slice of top-quality capital against all assets on their balance sheets, regardless of risk. Introduced in 2014, the buffer was designed to stop banks once again becoming dangerously over-leveraged, as many did before the 2008 crash.

For years industry groups have claimed the SLR is blunt and punitive, arguing that it discourages banks from holding even the safest assets, such as US Treasuries and deposits at the Federal Reserve.
“Penalising banks for low-risk assets like Treasuries undermines liquidity precisely when markets most need it,” says Greg Baer, chief executive of the Bank Policy Institute. “Regulators should act now rather than wait for the next crisis.”

Those arguments have found a sympathetic ear in Washington. Steven Mnuchin, the Treasury secretary, told lawmakers last week that reforming the SLR was “a high priority”, while Fed chair Jay Powell said in February that recalibrating the ratio would be part of a wider overhaul of Treasury-market structure. Officials are now weighing two main options: cutting the headline leverage requirement for big banks, or excluding ultra-safe assets from the calculation altogether, a temporary measure adopted during the pandemic that freed billions of dollars in balance-sheet capacity.

Either change would allow banks to expand holdings of government bonds, potentially lowering US borrowing costs, an outcome squarely in line with President Donald Trump’s desire to finance the federal deficit more cheaply. It could also lure traditional dealers back into a market long dominated by high-frequency traders and hedge funds after stricter capital rules nudged banks to the sidelines.

Analysts at Autonomous Research estimate that fully re-introducing the 2020 exemption for Treasuries and central-bank deposits would unlock roughly $2 trn of balance-sheet capacity across the eight US global systemically important banks. Cutting the overall leverage ratio from its current 5 per cent towards international norms of 3 ½-4 ¼ per cent would have an even bigger effect, although the precise figure will depend on how the Fed meshes the new regime with its annual stress tests and risk-weighted capital floors.

Yet the plan is already drawing fire from academics and former officials who warn that chipping away at back-stop capital buffers while markets remain volatile is risky.
“Given the array of geopolitical and economic uncertainties facing the US, this is the wrong moment to loosen leverage standards,” says Nicolas Véron, senior fellow at the Peterson Institute for International Economics. “Once you erode safeguards in good times, it is very hard to rebuild them when conditions turn.”

European regulators are also watching nervously. If Washington carves Treasuries out of its leverage ratio, lenders in the eurozone and the UK may press for similar relief on sovereign bonds, potentially weakening the global rulebook agreed after the crisis.

Under current US rules the eight biggest banks; JPMorgan Chase, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, Wells Fargo, Bank of New York Mellon and State Street — must hold so-called Tier 1 capital worth at least 5 per cent of total leverage exposure. Their European, Canadian and Japanese peers typically face requirements closer to 3½-4 ¼ per cent.

In practice, most Wall Street groups are already constrained by risk-weighted ratios or Fed stress-test buffers, which means a lower SLR might not immediately translate into larger share buy-backs or dividend payouts. State Street, with its massive custody business, is widely judged the only bank genuinely capped by the leverage rule today. Still, lobbyists argue that narrowing the transatlantic gap would give all the majors additional “headroom” to intermediate in core markets during periods of strain.

Sean Campbell, chief economist at the Financial Services Forum, which represents the eight largest US banks, says simply aligning American rules with Basel standards would “provide more relief than exempting Treasuries alone”. He adds: “The latter would leave the US an outlier and could invite retaliation abroad.”

The agencies must still agree on a joint proposal and submit it for public comment — a process that normally takes months. Capitol Hill Democrats can be expected to fight any significant dilution. But Republicans, who control the House and have made rolling back regulation a central plank of their economic agenda, are likely to back the changes. The White House, eager to portray itself as pro-growth and anti-red-tape, is pressing for rapid progress.

Once the draft is out, banks and investors will focus on two technical questions: how the Basel floor for risk-weighted capital will interact with a lighter SLR, and whether the Fed plans to adjust its stress-test methodology to stop the two frameworks colliding. Markets remember that in 2019 JPMorgan chief executive Jamie Dimon blamed the leverage ratio for forcing him to turn deposits away at quarter-end, highlighting the unintended consequences of overlapping rules.

The stakes are high. Supporters say a looser SLR would restore balance to a capital regime that has grown too rigid, stifling market-making and putting US banks at a competitive disadvantage. Critics counter that raw leverage was the ultimate cause of the 2008 bust, and that a broad-based cushion, unlike risk-weighted measures, which can be gamed, is the simplest safeguard against future blow-ups.

Regulators must therefore weigh the near-term benefit of cheaper funding for the Treasury and deeper bond-market liquidity against the longer-term cost of thinner loss-absorbing buffers. If they misjudge, they could find themselves and taxpayers on the hook when the next downturn arrives.

For now, momentum sits with the lobbyists. With the Trump administration intent on cutting red tape across environmental, financial and disclosure rules, the SLR looks set to be the next target. The precise shape of the reform remains fluid, but the direction of travel is clear: Washington is preparing to dial back one of the signature safeguards of the post-crisis era.

What comes next will be a test of regulators’ ability to fine-tune safety without rekindling the excesses that led to disaster in 2008. The banking industry, eager for relief but wary of the political optics, will hope officials strike the right balance. Critics, meanwhile, will be watching closely for any sign that the hard-won lessons of the last crisis are being forgotten.