Katanga Johnson
2 min read
(Bloomberg) -- Federal Reserve Chair Jerome Powell said Tuesday that potential changes to a key capital buffer should bolster banks’ roles as intermediaries in the US Treasuries market.
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“When the leverage ratio is binding, it discourages banks from undertaking low-margin, fairly safe activities such as mediation in the Treasury markets,” Powell said at a House Financial Services Committee hearing. “This should encourage more mediation.”
The Fed and other banking agencies are poised to unveil a plan this week to decrease what’s called the enhanced supplementary leverage ratio, which requires banks to hold a certain amount of capital relative to their assets.
The proposal would reduce the buffer by as much as 1.5 percentage points for the largest lenders, Bloomberg News reported earlier this month, and would look to change the ratio instead of excluding specific assets like Treasuries, as some observers had predicted.
It would look to lower a bank-holding company’s capital requirement under the eSLR to a range of 3.5% to 4.5%, down from the current 5%, according to people briefed on the discussions who asked not to be identified discussing nonpublic information. The firms’ banking subsidiaries would also likely see their requirement reduced to the same range from the current 6%, the people said.
Powell told lawmakers on Tuesday that the proposal would ask the public to weigh in on whether the agencies should exclude certain assets from the leverage ratio calculation. The Fed chair added that he has supported leverage ratio changes for a long time.
The banking industry and some regulators have said the current capital rule can limit lenders’ trading in the $29 trillion Treasuries market during times of stress, as those securities are treated in line with much riskier assets. But others argue that easing the rule could lead to instability in the financial system.
The Fed announced last week that its board will meet on Wednesday to discuss the plan. The Federal Deposit Insurance Corp. will hold its meeting Thursday about changes to the eSLR — which went into effect in 2018.
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