US poised to relax key post-2008 bank capital rule

US officials are preparing to announce one of the largest cuts to bank capital requirements in over a decade.

This is seen as the latest sign of the Trump administration’s deregulation agenda.

According to sources familiar with the matter who spoke to the Financial Times (FT), regulators are preparing to lower the supplementary leverage ratio (SLR) in the next few months.

The rule requires large banks to hold a predetermined amount of high-quality capital against their total leverage.

This leverage includes assets such as loans and off-balance sheet risks like derivatives.

The rule was introduced in 2014 as part of comprehensive reforms following the 2008-09 financial crisis. Bank lobbyists have campaigned against this rule for years, arguing that it penalizes credit institutions holding even low-risk assets like US Treasury bonds, makes trading in the $29 trillion government debt market difficult, and weakens their lending capabilities.

Greg Baer, CEO of the Banking Policy Institute lobby group, said, “Penalizing banks for holding low-risk assets like Treasury bonds weakens their ability to support market liquidity during stressful times when it is most needed. Regulators should act now instead of waiting for the next event.”

Lobbyists expect regulators to present reform proposals by the summer.

The easing of capital rules comes at a time when the Trump administration is cutting back regulations in everything from environmental policies to financial disclosure requirements.

However, critics say that given recent market fluctuations and policy changes under President Donald Trump’s administration, reducing bank capital requirements is a worrying development.

Nicolas Véron, a senior fellow at the Peterson Institute for International Economics, argued, “Considering the current state of the world, there are all sorts of risks for US banks, including the role of the dollar and the direction of the economy. It does not seem like the right time to loosen capital standards.”

Analysts say that rolling back the SLR would be a boon for the Treasury market and could help Trump achieve his goal of lowering borrowing costs by allowing banks to purchase more government bonds.

This could also encourage banks to take on a larger role in Treasury bond trading, after the sector lost ground to large traders and hedge funds due to rules introduced after the financial crisis.

Leading US policymakers have voiced their support for easing the SLR rule. US Treasury Secretary Scott Bessent said last week that such a reform is a “high priority” for the main banking regulators: the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

Fed Chair Jay Powell said in February: “We need to work on the structure of the Treasury market, and the answer to part of this problem may be, and I think will be, reducing the calibration of the supplementary leverage ratio.”

Currently, the eight largest US banks are required to hold so-called Tier 1 capital (common equity, retained earnings, and other items that are first to absorb losses) equivalent to at least 5% of their total leverage.

The largest banks in Europe, China, Canada, and Japan are held to a lower standard, with most requiring capital of only 3.5% to 4.25% of their total assets.

Bank lobbyists hope that the US will align its leverage ratio requirements with international standards. Another option being considered by regulators is to exclude low-risk assets, such as Treasury bonds and central bank deposits, from the leverage ratio calculation, as was temporarily implemented for a year during the pandemic.

Analysts at Autonomous estimate that reintroducing this exemption would provide an approximately $2 trillion increase in balance sheet capacity for large US lenders.

However, this would make the US an international exception, and regulators in Europe are concerned that credit institutions might demand similar capital relief for their positions in Eurozone government debt and UK government bonds.

Most large US banks are more constrained by other rules, such as the Fed’s stress tests and risk-weighted capital requirements, which could limit how much they benefit from SLR reform.