Fed kicks off effort to ease bank leverage rules

By Pete Schroeder

WASHINGTON (Reuters) -The Federal Reserve meets on Wednesday to advance a proposal that would ease leverage rules for banks, which would grant the industry a long-sought win they say will help big firms facilitate Treasury market trading.

The central bank's Washington board will consider a plan to revamp the so-called supplementary leverage ratio (SLR), which directs banks to hold capital against assets regardless of their risk level.

Originally designed as a backstop to ensure banks hold some capital on even relatively risk-free assets like U.S. Treasury debt, the industry complains it has become a constraint that actually impedes their ability to facilitate trading in U.S. Treasury markets during times of stress.

The Fed had previously flagged that the SLR may need some tweaks after it exempted some requirements amid market strains during the COVID-19 pandemic, and now Fed officials plan to advance a more lasting solution.

"It would be better if we had a leverage ratio that was a backstop rather than a binding thing, and that's what this proposal is going to do," said Fed Chairman Jerome Powell at a congressional hearing Tuesday.

Powell told lawmakers the Fed is expected to advance a proposal that would tweak the formula calculating the "enhanced" SLR (eSLR), which requires the nation's largest banks to hold an extra layer of capital.

Specifically, the Fed is expected to mirror an effort regulators pitched in 2018 that failed to advance, which would tie leverage requirements to the overall risk each bank is deemed to pose on the financial system.

However, he added the Fed would seek feedback on alternative methods of relief, such as broadly exempting Treasury securities from the requirement altogether.

A Fed spokesperson declined to comment ahead of the board meeting.

"We believe regulators want to provide banks with more space before riskless assets could make the eSLR a binding constraint," Jaret Seiberg, an analyst with TD Cowen, wrote in a note.

The leverage changes are the first of what is expected to be a broad deregulatory agenda from the Fed's new top regulatory official, Vice Chair for Supervision Michelle Bowman. President Donald Trump, who nominated Bowman for the post, has made trimming regulations a top priority in a bid to boost economic growth.

On Monday, she said the leverage rewrite is a first step in overhauling "distorted" capital requirements on banks, which were drastically ratcheted up after the 2008 financial crisis. Other future changes could include weakening an additional surcharge imposed on large global banks and tweaking thresholds under which banks face increasingly strict rules as they grow in size.

However, the new plan has its critics, who argue stepping back rules intended to keep banks stable injects unnecessary risk into the system at the behest of the industry.

Senator Elizabeth Warren, the top Democrat on the Senate Banking Committee, said in a letter to regulators on Tuesday she had "grave concerns" about the plan.

"If the banking agencies gut this requirement, the big banks will load up on more debt, pay out more money to shareholders and executives, and put the entire economy at risk of another financial crash," she wrote. "There is no valid rationale for your agencies to impose these risks on the American public."

(Reporting by Pete Schroeder; Editing by Sam Holmes)