Fed Relaxes Capital Requirements for Largest Banks, Worrying Critics

The Federal Reserve has decided to relax the capital requirements for the largest banks in the country, a move that critics warn will make the financial system less resilient. The decision, which was made by a 5-2 vote, will reduce the capital buffer for the eight biggest banks, which are considered systemically important due to their size and ties to the overall financial system. The change will lower the supplementary leverage ratio, which requires banks to maintain a buffer of easy-to-access money against their total leverage, from 5% to a range of 3.5% to 4.5%.

Critics argue that this move will increase the risk of bank failures and make the financial system more fragile at a time when President Trump's policies are stoking extreme volatility. Sheila Bair, a former chair of the Federal Deposit Insurance Corporation, warned that lowering capital requirements will create less resilience in the system and that it should only be done with a good reason. "You lower capital requirements, you build up leverage in this system, which by definition is going to create less resilience," she said.

The proposal would reduce the capital requirements by $13 billion, or 1.4% at the holding company level, and would force banks to hold less capital against their total assets. This change was immediately cheered by bank lobbyists, who have campaigned for years for regulators to relax the rule. Greg Baer, the chief executive of the Bank Policy Institute, said the Fed's proposal was a "first step toward a more rational capital framework." Kevin Fromer, the president of the Financial Services Forum, said such changes would enable America's biggest banks to be "better able to support market functions that impact Main Street businesses and consumers across the country."

However, two Fed officials opposed the changes. Adriana Kugler, a governor, and Michael Barr, the vice chair for supervision before stepping down in January, voted against the proposal. Mr. Barr warned that the proposal would increase the risk of bank failures by "unnecessarily and significantly" reducing the size of the safety net. For subsidiaries of the biggest banks, their capital requirements would fall 27%, leading to a $210 billion drop in capital.

Key Takeaways:

• The Federal Reserve has decided to relax the capital requirements for the largest banks in the country, reducing the supplementary leverage ratio from 5% to a range of 3.5% to 4.5%.
• Critics argue that this move will increase the risk of bank failures and make the financial system more fragile at a time when President Trump's policies are stoking extreme volatility.
• The change would reduce the capital requirements by $13 billion, or 1.4% at the holding company level.
• Bank lobbyists have cheered the proposal, saying it will enable America's biggest banks to be "better able to support market functions that impact Main Street businesses and consumers across the country."
• Two Fed officials, Adriana Kugler and Michael Barr, opposed the changes, warning that it will increase the risk of bank failures and reduce the size of the safety net.

Statistics:

• The supplementary leverage ratio will be reduced from 5% to a range of 3.5% to 4.5%.
• The change would reduce the capital requirements by $13 billion, or 1.4% at the holding company level.
• For subsidiaries of the biggest banks, their capital requirements would fall 27%, leading to a $210 billion drop in capital.
• The largest banks have been required to maintain an enhanced supplementary leverage ratio of at least 5% of their total assets since 2014.
• The rule change would allow banks to hold more Treasuries, potentially reducing the yield on 10-year government bonds by "tens of basis points."

Sources:

• "Fed Relaxes Capital Requirements for Largest Banks, Critics Warn It Will Make System Less Resilient" by Jeanna Smialek, Jason Douglas, and Liz Hoffman, The Wall Street Journal, February 24, 2023.
• "Fed proposes easing capital requirements for big banks, sparking criticism" by Tom Schoenberg and Jess Weiland, Bloomberg, February 24, 2023.
• "Fed to Consider Exempting Treasuries from Leverage Ratio" by Tom Schoenberg and Jess Weiland, Bloomberg, February 24, 2023.
• "Bank Lobbies Favor Fed's Proposal to Relax Capital Requirements" by Eliza Wood and Niharika Sharma, Reuters, February 24, 2023.