As part of a broader effort at deregulating the banking sector, U.S. policymakers are musing about easing leverage rules — a step that would be negative for the credit quality of the big U.S. banks, says Moody’s Ratings.
In a new report, the rating agency said that policymakers and regulators have talked about lowering the supplementary leverage ratio (SLR) — the ratio of banks’ tier 1 capital to their total leverage — which would represent an easing of this component of the capital requirements.
Such a move, “would be credit negative” for the eight U.S. global systemically important banks (G-SIBs), Moody’s said.
Tinkering with the ratio would reduce the amount of capital that the big banks have to hold.
Currently, all banks have a minimum SLR requirement of 3%, the G-SIBs (including JPMorgan Chase & Co., Bank of America Corp., Citigroup, Inc., Goldman Sachs Group, Morgan Stanley, Bank of New York Mellon, State Street Corp. and Wells Fargo & Co.) are required to have an additional 2% buffer, and the G-SIBs’ subsidiaries must maintain a 6% ratio to be considered “well capitalized,” it noted.
However, even if the leverage ratio is modified, “there is little room before other capital ratios would become binding,” the report said.
As a result, reducing the ratio would not be expected to have a meaningful impact on the big banks’ capital strategies unless that change is also accompanied by other changes to the banks’ capital requirements.
At the same time, lowering the leverage ratio would likely be a net positive for overall liquidity of the U.S. Treasury market, the report said.
“A change in the SLR could facilitate increased intermediation of U.S. Treasuries by the broker-dealer subsidiaries of bank holding companies,” it said.
While Treasury market liquidity would likely improve, an increase in this activity, “would expose the G-SIBs to interest rate risk, particularly if concentrated in long-dated Treasuries with substantial duration.”