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Regulators poised to ease leverage limits for Wall Street banks

Apr 12 2018 19:09
Jesse Hamilton, Bloomberg

Washington - US regulators are poised to ease leverage limits for Wall Street banks, potentially freeing up tens of billions of dollars for lending and other business activities in the latest move to relax post-crisis financial rules that the Trump administration blames for stifling growth.

In its second significant proposal this week, the Federal Reserve - along with the Office of the Comptroller of the Currency - said on Wednesday that it wants to scrap an existing method for measuring each bank’s borrowing limits and instead tailor restrictions to the risks posed by specific firms.

The change could be meaningful. While the regulators estimate it would free up a modest $400 million among the biggest banks’ holding companies, they said the amount of capital that lenders are required to maintain in their main subsidiaries might fall by a whopping $121bn.

At issue is what’s known as the leverage-ratio rule - a requirement that US banks maintain a minimum level of capital against all their assets so they can better withstand losses.

Tailoring Risk

Fed and OCC staffers have been working for months to better align the leverage ratio with a recent global agreement at the Basel Committee on Banking Supervision. The effort has drawn opposition from the Federal Deposit Insurance which is still led by a Barack Obama appointee, people familiar with the matter have said.

The proposal “would further tailor leverage ratio requirements to the business activities and risk profiles of the largest domestic firms,” the Fed and OCC said in a statement.

Established in the wake of the 2008 financial crisis, the leverage ratio is meant to evaluate whether a bank is getting overextended in its borrowing.

Wednesday’s proposal would throw out a fixed part of the calculation for some of the largest banks and replace it with a threshold directly tied to each institution’s so-called risk-based capital “surcharge,” which varies based on its size and complexity.

The regulators have also had to contend with a parallel effort from Congress that would revamp how the rule handles the custody banks.

Brainard opposition

The Fed’s vote was 2-to-1, with opposition from Governor Lael Brainard, who has argued against easing capital and liquidity demands at a time when “credit growth and profitability in the US banking system are robust”.

On Tuesday, the agency proposed an overhaul of its risk-based capital rules to better align them with its annual stress tests of banks - and to tailor capital demands to each bank’s business.

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