On November 24, 2020, the Federal Reserve proposed changes to key capital rules, specifically the Enhanced Supplementary Leverage Ratio (ESLR), which governs the capital banks must hold. The aim is to address concerns about liquidity in financial markets and to relax what some officials view as restrictive capital requirements. This proposal could drastically reduce capital requirements for major banks, dropping from a current range of 5% to as low as 3.5% to 4.5%.
Fed Chairman Jerome Powell noted that the increase in low-risk assets on banks’ balance sheets has made existing leverage ratios more burdensome, suggesting a reevaluation of these regulations. Supporters, including Vice-Chairwoman Michelle Bowman, argue that the changes could enhance resilience in the U.S. Treasury market and reduce the need for future Fed interventions.
However, some critics, including former officials, worry that the proposed changes could lead banks to prioritize shareholder returns over market stability, potentially undermining safety measures. The regulations are also intended to align with international Basel standards for banking practices. The Fed is set to vote on these proposals soon.
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