The Trump administration is preparing to make the largest cut in bank capital requirements in more than a decade, according to the Financial Times. The paper called it a sign of deregulation, but as GlobeSt.com reported in February, the idea has been in play since the early days of Trump’s second term.
Rather than simply reducing regulation — a broad goal of the administration — the proposed changes to bank capital requirements appear aimed at boosting the price of the 10-year Treasury note, which would help push yields lower. While capital requirements are unlikely to be eliminated entirely, this move signals an effort to influence Treasury markets through regulatory adjustments.
The capital requirement is technically called the Supplementary Leverage Ratio (SLR). The SLR rule was part of the Basel III reforms in 2014 to improve bank stability. Basel III, in turn, was a response to the Global Financial Crisis to ensure that banks always had enough capital on hand to manage losses from market shifts of assets they held.
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Up until now, banks subject to U.S. regulations have been required to maintain an SLR of at least 3%. The eight systemically important banks — the giants — were supposed to have 5% on hand. Banking institutions have chafed under the requirements, wanting lower SLR levels so they could redeploy money into other uses. They objected to having to hold higher reserves even for assets traditionally seen as safe as possible, like Treasurys.
“Penalizing banks for holding low-risk assets like Treasuries undermines their ability to support market liquidity during times of stress when it is most needed,” Greg Baer, chief executive of the Bank Policy Institute lobby group, told the Financial Times. “Regulators should act now rather than waiting for the next event.” The paper noted that regulators will likely suggest potential reform levels by summer.
However, the real hope for Trump is that banks will decide to redirect some of the extra capital into Treasury instruments, especially the 10-year, which is typically the risk-free component of longer-term interest rates, including those in commercial real estate.
More purchases will create demand that, in theory, would be matched by higher prices in the notes. Because bond prices and interest rates move inversely to each other, yields on the 10-year would then drop.
The downward shift in interest rates would, following this logic, help the administration manage federal debt in two ways. One is that lower yields would make refinancing national debt less expensive, taking pressure off the budget.
The other way is that longer-term investments requiring financing would find it easier, thereby increasing economic activity. If the economy grows faster than debt, a difficult hurdle to clear, as debt typically continues to grow during strong economic times, then the debt becomes easier to manage, creating more time to lower the debt in smaller steps rather than large ones that are politically impossible to achieve.
Fed Chair Jerome Powell appears inclined to accept this change, noting in February that, “The amount of Treasuries has grown much faster than the intermediation capacity has grown and one obvious thing to do is to reduce the effective supplemental leverage ratio, the bindingness of it."
However, the bank failures of 2023 serve as a reminder that it is still possible for banks to hold insufficient capital as a buffer against market shifts in asset valuations.
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