Fed plan to ease leverage rule offers windfall for big US banks, Morgan Stanley says

The Federal Reserve has proposed relaxing the enhanced supplementary leverage ratio (eSLR) for large U.S. global banks, a move estimated by Morgan Stanley to free up $185 billion in capital and unlock nearly $6 trillion in balance sheet capacity. Approved by a 5-2 Fed vote, this reform aims to boost bank participation in U.S. Treasury markets and is seen as the first of several potential deregulatory actions under Vice Chair Michelle Bowman, providing banks with significant capacity to expand low-risk asset holdings.

Analysis

The Federal Reserve has proposed a significant relaxation of the enhanced supplementary leverage ratio (eSLR) for large U.S. global banks, a move that could materially enhance their financial flexibility. According to an estimate from Morgan Stanley, this reform could free up approximately $185 billion in capital and unlock nearly $6 trillion in balance sheet capacity. The proposal, approved by a 5-2 Fed vote and led by Vice Chair for Supervision Michelle Bowman, is designed to increase bank participation in the U.S. Treasury market by better aligning capital requirements with the low-risk nature of these assets. Analysts at Barclays concur, noting the change should provide the banking system with meaningful capacity to expand its holdings of low-risk assets, provided the returns are sufficient. This is viewed as the first in a potential series of deregulatory actions, signaling a potentially more favorable capital environment for the largest U.S. financial institutions.

Key Decisions for Investors

• Consider increasing exposure to large U.S. global banks, as the proposed eSLR reform represents a significant positive catalyst that could enhance earnings capacity and shareholder returns.
• Monitor individual bank disclosures to identify institutions most constrained by current leverage rules, as they stand to benefit disproportionately from the freed-up capital and balance sheet flexibility.
• Track future announcements from the Federal Reserve regarding the final rule and its implementation timeline, as the 5-2 vote indicates some dissent which could influence the final details of the reform.