The Federal Reserve is proposing to reduce the amount of capital the US’s biggest banks are required to hold by modifying the way a key leverage ratio is calculated.
On Wednesday the Fed and another bank regulator, the Office of the Comptroller of the Currency, announced a plan to revise a metric known as the enhanced supplementary leverage ratio, which has long been a source of discontent at big banks.
The Fed said: “The proposed changes seek to retain a meaningful calibration of the enhanced supplementary leverage ratio standards while not discouraging firms from participating in low-risk activities.”
The central bank, which is now led by appointees of Donald Trump, announced the proposal with no fanfare.
But Marcus Stanley, policy director at Americans for Financial Reform, which wants tougher regulation of Wall Street, said: “This rule would be easily the most significant rollback of post-crisis risk controls for the largest banks since Trump took office.”
The central bank said the changes would reduce the aggregate amount of tier one capital required by the US’s eight systemically important banks by a net $400m, or approximately 0.04 per cent, at the level of their holding companies.
But that figure was described as “wildly misleading” by Mr Stanley. He said $400m was the amount of capital the banks could immediately return to their shareholders if the proposal were finalised today.
“But this rule could lower capital requirements by many tens or even hundreds of billions in capital if the banks change their balance sheets to load up on assets that regulators assign a low risk weight — such as AAA-rated mortgage-backed securities before the crisis, or Greek debt today,” Mr Stanley said.
The change would replace a static leverage ratio with a more “dynamic” metric that takes into account the different risk profiles of banks. The custody banks, which specialise in keeping financial assets safe, tend to engage in mostly low-risk activity.
Work on the proposal began under the Fed’s former regulatory chief, Dan Tarullo, an appointee of Barack Obama. He has now been replaced by Trump pick Randal Quarles.
Big banks are currently required to maintain a supplementary leverage ratio of more than 5 per cent — comprising a minimum 3 per cent plus a 2 per cent buffer. For lower-risk institutions the proposal would reduce the buffer to 1 per cent.
The Fed did not release estimates of how the proposal would reduce the capital requirements of individual banks.
Mr Stanley said: “During the 2008 crisis leverage capital was by far the best protection against bank failure . . . This action is short-sighted and irresponsible and shows that regulators are caving in to the agenda of too big to fail banks.”
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