The Federal Reserve plan to ease capital requirements for low-risk assets will generate trillions of dollars in balance sheet flexibility for Wall Street’s biggest banks thus enabling them to free up billions of capital and boost liquidity in Treasury markets.
The supplementary leverage ratio (SLR) changes received approval through a 5-2 vote which established new capital requirement scales based on global systemic importance of each institution. The plan according to Morgan Stanley analysts will allow major banks to access $185 billion in additional capital. Goldman Sachs predicts the reform will release $5.5 trillion worth of balance sheet capacity across the entire sector.
Major lenders experienced positive share price movements. The S&P 500 Banks Index increased by 1.4% while JPMorgan Morgan Stanley Goldman Sachs Citigroup and Bank of America each gained more than 1%.
The proposed overhaul led by Fed Vice Chair for Supervision Michelle Bowman represents the initial move in a sequence of deregulatory actions. The regulatory modifications will minimize the obstacles that prevent banks from holding U.S. Treasuries which should enhance liquidity in essential funding markets.
The current rules which require banks to maintain equal capital for all assets including ultra-safe Treasuries limit their ability to support government debt markets according to critics. The new framework seeks to establish a regulatory system that matches oversight requirements with actual risk levels.
