U.S. Banking Industry Seeking Capital Requirement Revisions

By Pete Schroeder, Saeed Azhar, Davide Barbuscia
WASHINGTON/NEW YORK (Reuters) – The banking industry is optimistic that U.S. regulators will soon adjust capital requirements for safe investments due to last month’s Treasury market turmoil.

This revamp of the “supplementary leverage ratio” (SLR) could allow banks to reserve less cash, facilitating increased lending or other activities, and encourage them to engage more in Treasury markets.

Kevin Fromer, president and CEO of the Financial Services Forum, believes current leverage-based capital requirements are outdated and impede economic growth, hence urgent reform is essential for the benefit of taxpayers and the economy.

Regulators have noted the need to reconsider the SLR and are contemplating adjustments to lessen burdens on large banks, particularly regarding investments in safe assets like Treasury bonds. Discussions are ongoing with hopes for proposals this summer.

Treasury Secretary Scott Bessent indicated that revamping the SLR is a top priority for regulatory bodies, including the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency.

Banks have argued for years that the SLR, established after the 2007-2009 financial crisis, has increasingly restricted lending by requiring capital reserves against safe assets.

BPI President Greg Baer called the reform overdue. In a recent Congressional inquiry, Fed Chair Jerome Powell acknowledged the leverage requirements might deter banks from supporting the Treasury market, suggesting it be revisited.

Currently, banks must hold 3% capital against leverage exposure, with global banks requiring an additional 2% under the “enhanced supplementary leverage ratio.” Regulators could relieve this by exempting Treasury bonds from SLR calculations, as was done in response to the COVID-19 pandemic. Alternatively, they may refine the enhanced SLR formula for a lower ratio.

Any relief in leverage coincides with broader discussions on revising other capital requirements and stress tests for large banks. Recent comments by bank executives emphasized the need for SLR reform.

Proponents argue that maintaining a leverage requirement is vital to avoid overlooking potential risks, suggesting that any relief could improve liquidity in troubled Treasury markets, which are essential to the global financial system. April saw significant selloffs in the $29 trillion Treasury market, leading to higher U.S. borrowing costs.

Market speculation regarding potential reforms has influenced swap rate spreads in recent months, particularly following positive market sentiment from Trump’s election.