The time has come for the federal banking agencies to revisit leverage ratios and their effects on Treasury markets, Federal Reserve Vice Chair for Supervision Michelle Bowman said today during a speech on monetary policy.
Bowman’s remarks came a few days before the Federal Reserve was scheduled to meet to consider revisions to its supplementary leverage ratio standards, while the FDIC board will meet later this week to consider changes to its enhanced SLR standard for global systemically important banks. Bowman laid out the case for reforming the standards, saying the SLR has increasingly become “the binding capital constraint for the largest banks in the United States.”
While Bowman didn’t provide many details about the upcoming Fed proposal, she said the board will solicit public comment on potential fixes and work to develop an appropriate and effective solution. “This proposal takes a first step toward what I view as long overdue follow-up to review and reform what have become distorted capital requirements,” she said.
“We should also reconsider capital requirements for a wider range of banks, including the SLR’s application to banks with more than $250 billion in assets, Tier 1 leverage requirements, and the calibration of the community bank leverage ratio, ” Bowman added. She also noted the Fed will hold a conference on July 22 to discuss the U.S. bank capital framework, “including the design and calibration of leverage ratios.”
Regulatory adjustments
As part of a broader regulatory review, Bowman also recommended regulators revisit the G-SIB surcharge and the bank category thresholds, saying both need to better reflect the changes in economic growth and inflation that have taken place since they were set. (Related: ABA Viewpoint columns on the best way to index supervisory thresholds and indexing and inflation.)
“One way to prevent the original calibration from becoming divorced from the foundational policy decisions over time is to index the relevant G-SIB surcharge coefficients and regulatory thresholds to nominal gross domestic product,” Bowman said. “While approaches like indexing thresholds and requirements can make our regulations more robust and durable over time, we should also acknowledge the essential role of supervision as a tool to promote safety and soundness and financial stability. Just as our capital requirements are intended to operate in a complementary manner, so do regulation and supervision act in a complementary way.”
