According to a report by the Financial Times citing informed sources, U.S. authorities are preparing to announce the largest reduction in bank capital requirements in over a decade: regulators plan to lower the Supplementary Leverage Ratio (SLR) in the coming months, which will be the latest step in the Trump administration's financial deregulation policy.
Banking Industry Welcomes Reform: Calls for Relaxing Restrictions to Promote Market Liquidity
The Supplementary Leverage Ratio requires large banks to hold a certain percentage of high-quality capital against their total leverage exposure, including loans and off-balance sheet items (such as derivatives). Established in 2014, this system was part of a series of major reforms following the 2008-2009 financial crisis, aimed at strengthening financial institutions' ability to withstand systemic risks.
However, this regulation has been criticized by bankers for years. They argue that even holding low-risk assets like U.S. Treasury bonds is restricted by the SLR, preventing banks from effectively participating in the $29 trillion government bond market and reducing their lending capacity.
Greg Baer, Executive Director of the Bank Policy Institute, stated: "Penalizing banks for holding low-risk assets like Treasury bonds undermines their ability to provide liquidity during market stress, which is precisely when banks are most needed. Regulators should act immediately, rather than wait for the next crisis."
Market Uncertainty Leads to Regulatory Relaxation, Raising Concerns Among Some Economists
However, not everyone views this regulatory relaxation positively. Especially given the current market volatility and the unstable policy direction of the Trump administration, some economists believe this is not an appropriate time to reduce bank capital requirements.
For instance, Nicolas Véron, Senior Fellow at the Peterson Institute for International Economics, pointed out: "Considering the current global situation and the risks faced by U.S. banks, including the role of the dollar and economic trends, this does not seem like a time to loosen capital standards."
Despite these doubts, the U.S. government appears determined to push forward with the reform. Treasury Secretary Scott Bessent recently stated that this reform is a "high priority" for major regulatory bodies like the Federal Reserve (Fed), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC). Additionally, Fed Chairman Jay Powell noted in February: "We need to improve the structure of the Treasury market, and one solution is to lower the Supplementary Leverage Ratio standards, which is likely what we will do."
Releasing About 2 Trillion Dollars of Balance Sheet Capacity
Currently, the eight largest U.S. banks must maintain "Tier 1 Capital" - including common equity and retained earnings that can primarily absorb losses - at 5% of their total leverage exposure. In comparison, the standards for the largest banks in Europe, China, Canada, and Japan are significantly lower, mostly maintaining capital levels between 3.5% and 4.25%.
This difference has led U.S. bankers to continuously call for aligning SLR requirements with international standards. Regulators are also considering reintroducing a measure that excludes low-risk assets (such as Treasury bonds and central bank deposits) from leverage ratio calculations (a policy briefly implemented during the pandemic). According to the latest estimates by Autonomous, reintroducing this exemption could release about 2 trillion dollars of balance sheet capacity, providing large banks with more resources for market operations and lending.
However, the Financial Times also noted that if the U.S. implements this exemption, it could become an outlier in international regulation, potentially raising concerns in Europe. European regulators fear this could prompt local banks to demand similar treatment for sovereign debt and UK bonds, thereby undermining overall financial stability.
