The capital new regulations of the Trump administration exposed a huge strategy hiding 29 trillion in national debt.

Source: Jin10

The U.S. government is preparing to announce the largest reduction in bank capital requirements in over a decade, marking the latest sign of the Trump administration’s deregulation agenda.

According to the Financial Times, several insiders have revealed that regulators are preparing to lower the Supplementary Leverage Ratio (SLR) in the coming months. This rule requires large banks to hold a predetermined amount of high-quality capital against their total leverage exposure, which includes loans and other assets as well as off-balance-sheet risks such as derivatives. The rule was established in 2014 as part of a comprehensive reform following the 2008-09 financial crisis.

SLR (supplementary leverage ratio) is a capital adequacy metric for commercial banks set by the Federal Reserve. The calculation formula for SLR is Tier 1 capital / risk-weighted assets, where Tier 1 capital includes common equity and other Tier 1 capital. After the 2008 financial crisis, the Federal Reserve amended the SLR-related regulations to impose additional leverage limits on large U.S. banks to mitigate systemic risk in the banking sector.

Bank lobbyists have opposed this regulation for years, arguing that it penalizes lenders holding low-risk assets like U.S. Treasury bonds, hampers their ability to facilitate trading in the $29 trillion government debt market, and undermines their capacity to extend credit.

Greg Baer, CEO of the Bank Policy Institute, said: “Punishing banks for holding low-risk assets such as government bonds will undermine their ability to support market liquidity in times of stress when liquidity is most needed. Regulators should act now rather than waiting for the next event to occur.”

Lobbyists expect regulators to propose reform recommendations before this summer. As they consider easing capital rules, the Trump administration is rolling back regulations across various areas, from environmental policies to financial disclosure requirements.

However, critics argue that, given the recent market volatility and the policy turmoil during Trump’s administration, the timing of reducing bank capital requirements now is concerning.

Nicolas Véron, a senior fellow at the Peterson Institute for International Economics, said: “Given the state of the world, there are a variety of risks—including the role of the dollar and the direction of the economy for U.S. banks, it does not seem like the appropriate time to relax capital standards.”

Analysts say that the move to lower the SLR will bring benefits to the U.S. Treasury market and may help Trump achieve his goal of reducing borrowing costs by allowing banks to purchase more Treasury bonds. This will also encourage banks to play a larger role in Treasury trading, as regulations established after the financial crisis have caused the banking industry to lose its edge to high-frequency traders and hedge funds.

**Major U.S. policymakers have expressed support for easing the SLR. **U.S. Treasury Secretary Bessant said last week that such reform is a “top priority” for major banking regulators — the Federal Reserve, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC). Fed Chair Jerome Powell said in February: “We need to work on the structure of the Treasury market, and part of the answer can be, and I think it will be, to reduce the calibration of supplementary leverage.” ”

The eight major banks in the United States must currently hold at least 5% of their total leverage ratio in tier 1 capital, which includes common stock, retained earnings, and other capital items that can absorb losses preferentially.

Large banks in Europe, Canada, and Japan are subject to lower standards, with most only needing to maintain a capital level equivalent to 3.5% to 4.25% of total assets. Banking lobby groups hope the U.S. will align its leverage ratio requirements with international standards.

Another option considered by regulators is to exclude low-risk assets such as government bonds and central bank deposits from the leverage ratio calculation—this policy was temporarily implemented for one year during the pandemic. Autonomous analysts recently estimated that if this exemption is restored, large U.S. banks could free up about $2 trillion in balance sheet space.

However, this move will disconnect the United States from international standards, and European regulators are concerned that it may lead banks to seek similar capital benefits for sovereign bonds in the Eurozone and UK government bonds.

Most large American banks are more constrained by rules such as the Federal Reserve’s stress tests and risk-weighted capital requirements, which may limit their ability to benefit from the SLR reforms. Morgan Stanley analysts estimate that currently only State Street Bank is truly constrained by SLR.

The chief economist of the Financial Services Forum (a lobbying organization representing the eight largest banks in the United States), Sean Campbell, stated: “Excluding government bonds and central bank deposits from the SLR calculation, compared to aligning with international standards, can create a larger capital buffer for big banks.”

The Federal Reserve, OCC, and FDIC declined to comment.