Fed Proposes Lowering Capital Buffer to Boost Banks Role in Treasuries Market
(Bloomberg) -- Federal Reserve Chair Jerome Powell announced on Tuesday that potential changes to a key capital buffer could strengthen banks' roles as intermediaries in the U.S. Treasuries market.
Powell spoke at a House Financial Services Committee hearing, stating that the current leverage ratio discourages banks from engaging in low-margin, safe activities such as mediation in the Treasury markets. "This should encourage more mediation," he said.
The Fed and other banking agencies are expected to unveil a plan this week to decrease the enhanced supplementary leverage ratio (eSLR), which requires banks to hold a certain amount of capital relative to their assets. According to Bloomberg News, the proposal would reduce the buffer by as much as 1.5 percentage points for the largest lenders, and would change the ratio instead of excluding specific assets like Treasuries, as some observers had predicted.
The proposal would 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%. The firms' banking subsidiaries would also likely see their requirement reduced to the same range from the current 6%, according to people briefed on the discussions who asked not to be identified discussing nonpublic information.
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. He added that he has supported leverage ratio changes for a long time.
The banking industry and some regulators have said that 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. However, 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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The Federal Reserve's proposed reduction in capital buffer for banks aims to enhance their roles and responsiveness within the treasuries market, a move that could potentially boost liquidity but requires careful monitoring of potential risks.
The Fed's proposal to lower capital buffers aims at焕发增强各大银行在国债市场的角色，必然引发对金融市场稳定性的深层次讨论，尽管此举或能暂时刺激市场活力、降低融资成本和提振经济增长预期的连锁反应看似积极一面不少, 但在oremitted risks of structural vulnerability that could potentially culminate in renewed stability concerns cannot be overlooked.,
