Fed kicks off effort to ease bank leverage rules

WASHINGTON, June 25 (Reuters): The Federal Reserve meets on Wednesday to advance a proposal that would ease leverage rules for banks, which would grant the industry a long-sought win they say will help big firms facilitate Treasury market trading.
The central bank's Washington board will consider a plan to revamp the so-called supplementary leverage ratio (SLR), which directs banks to hold capital against assets regardless of their risk level.
Originally designed as a backstop to ensure banks hold some capital on even relatively risk-free assets like US Treasury debt, the industry complains it has become a constraint that actually impedes their ability to facilitate trading in US Treasury markets during times of stress.
The Fed had previously flagged that the SLR may need some tweaks after it exempted some requirements amid market strains during the Covid-19 pandemic, and now Fed officials plan to advance a more lasting solution.
"It would be better if we had a leverage ratio that was a backstop rather than a binding thing, and that's what this proposal is going to do," said Fed Chairman Jerome Powell at a congressional hearing Tuesday.
Powell told lawmakers the Fed is expected to advance a proposal that would tweak the formula calculating the "enhanced" SLR (eSLR), which requires the nation's largest banks to hold an extra layer of capital.
Specifically, the Fed is expected to mirror an effort regulators pitched in 2018 that failed to advance, which would tie leverage requirements to the overall risk each bank is deemed to pose on the financial system.
However, he added the Fed would seek feedback on alternative methods of relief, such as broadly exempting Treasury securities from the requirement altogether.
A Fed spokesperson declined to comment ahead of the board meeting.
"We believe regulators want to provide banks with more space before riskless assets could make the eSLR a binding constraint," Jaret Seiberg, an analyst with TD Cowen, wrote in a note.
The leverage changes are the first of what is expected to be a broad deregulatory agenda from the Fed's new top regulatory official, Vice Chair for Supervision Michelle Bowman. President Donald Trump, who nominated Bowman for the post, has made trimming regulations a top priority in a bid to boost economic growth.