Big banks are closer to getting one of biggest regulatory rollbacks since 2008

US regulators have proposed a significant rollback of bank capital rules, specifically the enhanced supplementary leverage ratio (eSLR), reducing requirements for major US banks by 1.4 percentage points for holding companies and 10 percentage points for their bank subsidiaries. Approved 5-2 by the Federal Reserve, this move aims to boost lending capacity and enhance Treasury market liquidity by easing constraints on low-risk asset holdings. While proponents argue it improves financial system resilience and is a first step in broader regulatory adjustments, dissenting Fed governors and lawmakers express concerns that it increases systemic risk and may primarily lead to capital distribution to shareholders rather than increased market intermediation.

Analysis

US regulators have proposed a significant rollback of the enhanced supplementary leverage ratio (eSLR) for the largest US banks, marking a major deregulatory shift. The proposal would lower the eSLR requirement for bank holding companies by 1.4 percentage points and, more critically, by 10 percentage points for their bank subsidiaries, which Governor Michael Barr estimates would free up approximately $210 billion in capital. Proponents, including Fed Vice Chair Michelle Bowman and Chair Jerome Powell, argue the change is necessary to improve US Treasury market functioning and resilience by reducing penalties on holding low-risk assets. However, the proposal passed with notable dissent in a 5-2 vote from the Federal Reserve governors. Dissenting governors Barr and Adriana Kugler warn that the move increases systemic risk without sufficient justification, cautioning that firms will likely divert the freed capital to shareholder distributions and higher-return activities rather than bolstering Treasury market intermediation. This action is framed as a "first step" in a broader review of capital requirements, with rules like the G-SIB surcharge also under consideration, signaling a sustained easing environment that is broadly positive for affected banks such as JPMorgan Chase, Bank of America, Goldman Sachs, and Morgan Stanley.

Key Decisions for Investors

• View this proposal as a significant near-term positive catalyst for systemically important banks (JPM, GS, MS, BAC), as the freed-up capital is likely to fuel increased shareholder returns through buybacks and dividends.
• Recognize that banks with significant trading operations, such as Goldman Sachs and Morgan Stanley, are positioned to benefit more directly from this specific rule change than their more traditional commercial banking peers.
• Monitor the upcoming public comment period and the Federal Reserve's July 22 conference for signals on the final form of the rule and the potential scope of further deregulation.
• Factor the dissenting warnings of increased systemic risk from Fed governors into long-term models, as a potential shift towards higher-risk activities could re-price the sector's risk premium in the future.