San Francisco Frontiers - US Fed proposes easing key banking rule

The Fed board voted 5-2 to propose amendments on a measure introduced after the 2008 global financial crisis, that requires banks to hold a certain amount of capital relative to their assets.

This was part of efforts to boost their stability.

The measure, called the "enhanced supplementary leverage ratio," calls for the country's biggest banks to hold an extra layer of capital.

Under the latest proposal, the capital requirement for holding companies is set to be lowered from its current five percent while banking subsidiaries will have their requirement reduced from six percent.

The plan will face a 60-day window for public comment.

The rule was initially set up as a "backstop," said Fed Chair Jerome Powell at the board's open meeting on Wednesday.

But he added that banks have increased the amount of "relatively safe and low-risk assets" on their balance sheets over the past decade or so.

"Based on this experience, it is prudent for us to reconsider our original approach," he said.

"We want to ensure that the leverage ratio does not become regularly binding and discourage banks from participating in low-risk activities, such as Treasury market intermediation," Powell said.

The Federal Deposit Insurance Corporation is also meeting Thursday about changes to the standard.

Fed vice chair for supervision Michelle Bowman said that "the proposal will help to build resilience in US Treasury markets."

She argued that it reduces the chance of "market dysfunction and the need for the Federal Reserve to intervene in a future stress event."

But Fed governors Michael Barr and Adriana Kugler expressed reservations about the plan.

Barr warned that the proposal significantly reduces bank capital, raising risks surrounding a major bank's failure.

Kugler, meanwhile, expressed doubt that benefits involving the Treasury market justified proposed reductions in capital requirements, "especially in light of the potential for elevated financial stability risk."

American Bankers Association president Rob Nichols called the proposal a key step towards boosting the financial system and "reducing bank funding costs."

"We urge regulators to move as quickly as possible to finalize these much-needed reforms," he added.

A.Smith--SFF