[BENGALURU] Large US global banks can expect as much as US$6 trillion in additional balance sheet capacity and billions in freed up capital under a Federal Reserve plan to relax leverage rules, Wall Street brokerages estimated on Thursday (Jun 26).
The US Fed unveiled a proposal on Wednesday that would overhaul how much capital large global banks must hold against relatively low-risk assets, as part of a bid to boost participation in US Treasury markets.
Shares of JPMorgan Chase advanced 1.3 per cent, Morgan Stanley 1.2 per cent and Goldman Sachs 1.6 per cent, while Bank of America added 1 per cent and Citigroup 1.5 per cent. The S&P 500 Banks Index, which tracks large-cap US lenders, rose 1.4 per cent.
The plan, approved by a 5-2 Fed vote, marks the first in a possible series of deregulatory moves led by the central bank’s new vice-chair for supervision, Michelle Bowman.
The proposal would reform the so-called “enhanced supplementary leverage ratio” so that the amount of capital banks must set aside is directly tied to how large a role each firm plays in the global financial system.
“SLR reform is the first of many capital proposals we expect over Michelle Bowman’s tenure,” Morgan Stanley analysts led by Betsy Graseck wrote in a note. It forecast that the proposal could free up US$185 billion for banks under its coverage.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
Treasury market boost?
The supplementary leverage ratio requires banks to hold capital against all assets equally, including low-risk US Treasuries – an approach critics said could discourage banks from holding government debt and limit their role in key funding markets.
Goldman Sachs analysts expects the rule change to free bank balance sheets by up to US$5.5 trillion.
“The changes to the SLR calculation should increase the availability (and potentially lower the cost) of short-term, secured financing for market participants, improving liquidity in financial markets and the US treasury market in particular.”
Fed officials described the changes as a necessary fix to a rule introduced after the 2008 crisis, saying the leverage requirement had grown over time to occasionally limit bank activity, especially as government debt surged in recent years.
“The Fed’s proposal to calibrate eSLR should give the banking system meaningful capacity to expand its balance sheet in low-risk assets,” analysts at brokerage Barclays said.
“It makes sense for banks to utilise the theoretical leverage capacity as long as the return from investing in low-risk assets/activity is sufficient,” they said. REUTERS
