Federal regulators formally launched the notice-and-comment process for their proposal to overhaul a risk-blind capital charge for the nation's biggest banks.
The Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency officially put their plan for reforming the enhanced supplementary leverage ratio, or eSLR, out for public input on Friday morning.
The move comes two days after the Federal Reserve Board held an open meeting about the revision plan and
The joint proposal would remove the 2% capital charge — a ratio set based on total on- and off-balance sheet exposures — applied to the eight largest banks in the country. Instead, those banks will face a capital requirement equal to one-half of their global systematically important bank, or GSIB, surcharge.
Using the GSIB surcharge as a baseline, the proposed change would ensure that the eSLR is reflective of the systemic footprint of each bank, but not penalize banks for engaging in low-risk, market-stabilizing activities.
According to regulators, the proposal will result in a 27% capital reduction at the depository institution level for the eight largest banks — JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY Mellon and State Street — but because of risk-based requirements, most of that capital will have to be retained by their respective holding companies.
Overall, the agencies say the proposal will lower holding company capital by less than 2%.
After the Fed's meeting this week, the proposal was received warmly by industry groups representing banks and trading companies, with those organizations heralding it as, at least, a step in the right direction for addressing what they see as a structural flaw in the capital requirement's design.
Banks have for years called for leverage ratio reform, arguing that the expansion of Treasuries and reserves held at the Fed have foisted those low-risk assets on their balance sheets. As a result, the eSLR has become the primary capital requirement banks must manage around — also known as the binding restraint.
Banking trade organizations have argued for exempting these low-risk assets from leverage ratio calculations, though stability hawks argue that doing so could increase interest rate risk in the banking system and lead to moral hazards.
In a statement on the eSLR proposal on Wednesday, the Bank Policy Institute said "further action" will be needed to recalibrate the ratio's calculation.
Public comment on the proposal will close on August 26.
