WASHINGTON–As expected, the Federal Reserve has proposed easing a key capital rule that banks have said limits their ability to operate, although two members of the Fed board dissented from the decision, saying it could undermine safeguards put in place after the financial crisis of 15 years ago.

Known as the enhanced supplementary leverage ratio, the measure regulates the quantity and quality of capital banks should be keeping on their balance sheets and is designed to promote stability.

In recent years, however, the biggest banks have argued they have built sufficient reserves and have called on the government to roll back the capital they must set aside 

“This stark increase in the amount of relatively safe and low-risk assets on bank balance sheets over the past decade or so has resulted in the leverage ratio becoming more binding,” Fed Chair Jerome Powell said in a statement. “Based on this experience, it is prudent for us to reconsider our original approach.”

What Proposal Would Do

In its draft form, the measure calls for:

• Reducing the top-tier capital big banks must hold by 1.4%, or some $13 billion, for holding companies. Subsidiaries would see a larger drop, of $210 billion, which would still be held by the parent bank. The standard applies the same rules to so-called globally systemic important banks as well as their subsidiaries.
• Lowering capital requirements to range of 3.5% to 4.5% from the current 5%, with subsidiaries put in the same range from a previous level of 6%.

Current Vice Chair for Supervision Michelle Bowman and Governor Christopher Waller released statements supporting the changes, saying the proposal will build resilience in U.S. Treasury markets and “reduce the likelihood of market dysfunction and the need for the Federal Reserve to intervene in a future stress event.”

Opposing Views

Governors Adriana Kugler and Michael Barr, the former vice chair of supervision, said they oppose the move.

“Even if some further Treasury market intermediation were to occur in normal times, this proposal is unlikely to help in times of stress,” Barr said in a separate statement. “In short, firms will likely use the proposal to distribute capital to shareholders and engage in the highest return activities available to them, rather than to meaningfully increase Treasury intermediation.”

The rule is now out for 60-day comment.

Credit Union Response

In response to the Fed proposal, America’s Credit Unions’ chief advocacy officer, Carrie Hunt, issued a statement saying the trade group “remains committed to securing true capital parity for credit unions as bank rules evolve. While credit unions have a statutory regime separate from banks, capital is key to growth and serving members, and we must not be put at a disadvantage to banks.  We support other capital regimes that help keep credit unions on an equal footing with comparable banks while maintaining safety and soundness. We will continue to engage with the NCUA, Congress, and other stakeholders to advance these and any other viable strategies. Ensuring a fair, flexible capital regime remains central to our mission of serving America’s 142 million credit union members.” 

House Introduces CU-Supported Bill

Separately, in the House the Expanding Access to Lending Options Act, which would provide credit unions with loan maturity flexibility, has been introduced.

“Economic uncertainty makes managing finances difficult. With the introduction of legislation to provide credit unions with loan maturity flexibility, Reps. Fitzgerald, Fitzpatrick, Sherman, Meuser, Kim, Vargas, and Timmons are giving 142 million Americans much-needed financial relief,” America’s Credit Unions President and CEO Jim Nussle said in a statement. “This bill enhances credit unions’ ability to offer loans at rates and terms that fit their members’ needs. Credit unions are a safe haven for Americans trying to make ends meet and invest in their future. We thank the lawmakers for introducing this bipartisan legislation, and we urge the House to quickly advance it.”