The Trump administration, through its appointed financial regulators, is preparing a proposal to ease key capital rules for the nation’s largest banks. This initiative would reduce the capital cushion that megabanks are required to maintain under post-2008 financial crisis regulations.
The plan is being crafted by the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). Treasury Secretary Scott Bessent confirmed that rolling back capital requirements is a priority, with formal action anticipated over the summer.
Trump-Era Regulators Aim to Revise Leverage Rule to Boost Economic and Market Activity
This proposed rule change signals a substantial shift from the regulatory direction under the Biden administration, which had pushed for increased capital requirements. Trump-era officials, however, argue that relaxing the rules will promote economic growth and bolster the financial sector.
The supplementary leverage ratio (SLR), which treats all assets, including safe ones like U.S. Treasuries, the same when calculating capital requirements, is the focal point of the revision. Critics of the SLR say it has constrained market activity and limited banks’ willingness to trade in government debt.
Trump-Era Regulators Push to Loosen Bank Capital Rules, Sparking Debate Over Financial StabilitySupporters of the proposed rollback, including Secretary Bessent, claim that easing the SLR will enhance liquidity in the Treasury market and contribute to lower interest rates. He has suggested the changes could reduce Treasury yields by 0.3 to 0.6 percentage points.
Regulators are debating whether to alter the leverage ratio formula or to permanently reinstate pandemic-era exclusions for Treasuries and central bank reserves. This could allow banks to take on more government debt without facing steeper capital requirements.
Critics Warn Eased Bank Rules Favor Wall Street, Heighten Financial System Risks
The proposed regulatory changes have met resistance from progressive groups and financial stability advocates. They argue that loosening capital rules increases systemic risk and that the justification based on Treasury market turmoil is disingenuous. Phillip Basil of Better Markets criticized the proposal as a risky giveaway to Wall Street, warning that it undermines the very rationale for capital safeguards. Opponents believe the move prioritizes industry profits over financial stability.
While proponents argue the changes will invigorate Treasury markets, some analysts doubt the impact will be significant. Gennadiy Goldberg of TD Securities noted that while the adjustments might slightly increase demand for Treasuries, they won’t resolve broader concerns like rising U.S. deficits or diminishing foreign investor interest. It also remains unclear just how much banks’ capital requirements will be reduced, leaving unanswered questions about the full scope and consequences of the policy shift.
