14 April 2018

Financial Times: Fed proposes cuts to capital requirements for largest banks

The more relaxed regime would benefit all eight US banks branded as systemically important, but it would do most for the custody banks State Street, BNY Mellon and Northern Trust.

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.

Full article on Financial Times (subscription required)

Related press release: Federal Reserve Board approves proposal to revise regulatory capital rules to address and provide an option to phase in the effects of the new accounting standard for credit losses

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