Major Shift in US Banking Regulations
In a significant move that benefits Wall Street's largest financial institutions, US regulators have finalized plans to relax capital requirements that banks had long argued constrained their ability to function effectively in the Treasuries market during periods of economic stress.
The Federal Deposit Insurance Corp. (FDIC), Federal Reserve, and Office of the Comptroller of the Currency jointly approved changes to what's known as the enhanced supplementary leverage ratio. This regulatory adjustment will enable major US lenders including Bank of America Corp., JPMorgan Chase & Co., and Goldman Sachs Group Inc. to maintain less capital relative to their total assets.
Specific Changes and Immediate Impact
FDIC Acting Chair Travis Hill announced on Tuesday that the revisions would reduce holding companies' capital requirement under the ratio to a range that is "substantially equivalent" to the June proposal. Under the final rule, banking subsidiaries will see their requirement lowered to a range of 3-4%, according to agency officials.
The decision triggered an immediate positive response in financial markets, with bank stocks climbing after the FDIC initially issued changes to leverage ratios that result in lower capital requirements. This regulatory shift represents a victory for Wall Street banking giants as officials continue to soften several capital measures that were established following the 2008 global financial crisis.
Despite pressure from major banks seeking exclusions for Treasuries from the revised ratio calculation—particularly after President Donald Trump's tariff announcements rattled markets earlier this year—the final rule does not specifically exclude these assets. Fed Governor Stephen Miran expressed support for such exclusions, stating that regulators missed an "opportunity to make a more lasting" change by not excluding Treasuries and US central bank reserves.
Quantifying the Regulatory Relief
FDIC staff estimates reveal that the new rule would result in a total requirement falling below the level of the risk-based tier 1 capital requirement for most major banks. While capital requirements for subsidiaries would decline under the final rule, requirements applicable to their parent holding companies would remain near current levels.
The scale of the regulatory relief is substantial: FDIC staff estimated that the aggregate reduction in tier 1 capital requirement for global systemically important banks would be $13 billion, while subsidiaries would see a reduction of approximately $219 billion.
"The final rule also includes conforming changes to other regulations that are tied to the leverage capital standards, such as the total loss-absorbing capacity and long-term debt requirement," the agencies confirmed in a joint statement.
Divergent Views and Broader Context
The leverage ratio forms part of the broader Basel III reforms agreed upon by global regulators to maintain financial system stability. Implemented in 2018, this measure treats all assets equally and serves as a backstop to other capital rules that assign different weightings to loans and bonds based on perceived risk.
The regulatory change has generated divided opinions among officials. Fed Governors Lisa Cook and Michael Barr opposed the final plan, arguing it would "unnecessarily and significantly reduce bank-level capital requirements." Cook warned that "a series of well-intended, individually reasonable actions can nevertheless result in disproportionately large reductions in overall capital that can reduce the resilience of the system."
Meanwhile, industry representatives welcomed the decision. Amanda Eversole, head of the Financial Services Forum, stated that "Today's decision empowers the nation's largest banks to support critical financial markets and provide essential lending, while maintaining strength and resilience."
The debate continues between proponents who argue the leverage ratio had become more restrictive than risk-based capital rules and critics who question whether banks will actually use the increased flexibility to purchase Treasuries as intended.
