The Federal Reserve is working to relax a key part of post-crisis demands for drastically increased capital levels at the biggest banks, according to people familiar with the work, a move that could free up billions of dollars for some Wall Street giants.
Central bank staffers are rewriting the leverage-ratio rule — a requirement that U.S. banks maintain a minimum level of capital against all their assets — to better align with a recent agreement among global regulators, said two people who requested anonymity because the process isn’t public. The people said the Fed effort is drawing opposition from the Federal Deposit Insurance Corp., an agency with authority over banking rules that’s still led by a Barack Obama appointee.
Spokesmen for the Fed and the FDIC declined to comment, as did a spokesman for the Office of the Comptroller of the Currency, another banking regulator involved in the discussions.
In December, U.S. regulators agreed with their overseas counterparts to set a new leverage-ratio standard representing a minimum level for member countries of the Basel Committee on Banking Supervision. The change could increase capital demands for some European institutions but is less stringent than what the U.S. adopted after the crisis. U.S. regulators are now aiming to scale back part of their existing ratio and add a new surcharge that would still leave overall capital requirements lower than they are now, the people said.
U.S. banking watchdogs have largely been taken over by appointees of President Donald Trump, who argues that deregulation will free banks to provide credit needed to boost economic growth. Key Trump appointees include Randal Quarles, the Fed’s vice chairman for supervision, and Joseph Otting, head of the OCC.
Fed Governor Jerome Powell — Trump’s nominee to replace Chair Janet Yellen — spoke in support of recalibrating the leverage ratio months before the Basel committee took action, a move he said “could help to reduce the cost that the largest banks face.” Even slight changes could have a big impact on firms including Morgan Stanley, and custody banks such as State Street and Bank of New York Mellon.
Work on a proposal is proceeding quickly at the Fed, one of the people said, and it could represent an easier path for banks to win relief than relying on a politically divided Congress to pass legislation revising the leverage ratio. The Treasury Department has also tried to get into the act, suggesting in a June report that Wall Street should get a break on some parts of the requirement — such as letting banks exempt certain assets from their leverage ratio calculations, including cash on deposit with the Fed.
Complex capital rules generally need approval from the Fed, the FDIC and the OCC. While the OCC is said to be cooperating with the Fed’s work, the FDIC is still led by Martin Gruenberg, an Obama administration holdover who has said changes to the capital rules will weaken the industry.
Gruenberg in a November speech warned that “the seeds of banking crises are sown by the decisions banks and bank policy makers make when they have maximum confidence that the horizon is clear.”
His opposition is likely to be only a temporary impediment. He is slated for replacement by bank lawyer Jelena McWilliams, who is set for a Senate confirmation hearing next week on her nomination to become FDIC chairman.