The Federal Reserve on Wednesday released a proposal to cut the capital buffer that big US banks are required to hold, triggering internal backlash from within the Fed board itself. This decision came directly from Fed Chair Jerome Powell, who argued that the current rule—the enhanced supplementary leverage ratio, or eSLR—has become too restrictive. Per Powell’s testimony to the Senate Banking Committee today, the suggested changes would significantly loosen a regulation originally put in place after the 2008 financial crisis to prevent another banking meltdown. The eSLR was meant to act as a hard floor on how much top-quality capital big banks had to hold. The idea was simple: keep the financial system from falling apart if banks get reckless again. But Powell now says the system is outdated. “This stark increase in the amount of relatively safe and low-risk assets on bank balance sheets over the past decade or so has resulted in the leverage ratio becoming more binding,” he said in a statement. “Based on this experience, it is prudent for us to reconsider our original approach.” Fed plan lowers capital floor by billions The Fed has opened a 60-day public comment window on the proposal. The draft would lower the capital requirement for bank holding companies by 1.4%, freeing up about $13 billion. The drop is even steeper for bank subsidiaries at $210 billion, though that capital would remain on the books at the parent level. Under the current framework, the eSLR requires holding companies to keep capital at 5%. The new range would bring that down to somewhere between 3.5% and 4.5%. Subsidiaries, which currently face a 6% threshold, would also move to that same range. This shift comes after years of pressure from Wall Street executives and Fed officials who say the rule treats all assets, risky or not, the same. US Treasurys, which are generally considered safe, are given the same weight as high-yield bonds under the current eSLR setup. With bank reserves ballooning and liquidity in the Treasury market becoming a major concern, Powell and others are pushing for what they describe as a more flexible rulebook. Not everyone agrees. Two Fed governors, Adriana Kugler and Michael Barr, are firmly against the proposal. Michael, who previously served as vice chair for supervision, said the change would not make banks more helpful during a financial crunch. “Even if some further Treasury market intermediation were to occur in normal times, this proposal is unlikely to help in times of stress,” he said. “In short, firms will likely use the proposal to distribute capital to shareholders and engage in the highest return activities available to them, rather than to meaningfully increase Treasury intermediation.” Two officials back change, two others push back On the other side, the plan has support from Michelle Bowman, who now holds the vice chair for supervision role, and Fed Governor Christopher Waller. Michelle claimed the change could help stabilize Treasury markets by allowing banks to hold more safe assets without getting penalized. “The proposal will help to build resilience in US Treasury markets, reducing the likelihood of market dysfunction and the need for the Federal Reserve to intervene in a future stress event,” she said. “We should be proactive in addressing the unintended consequences of bank regulation, including the bindingness of the eSLR, while ensuring the framework continues to promote safety, soundness, and financial stability.” Christopher also supported the change, echoing Powell’s concerns that the leverage ratio is now acting more like a constraint than a protection. The rule’s equal treatment of all assets is being criticized as outdated, especially when applied to banks holding large volumes of low-risk assets. But for opponents like Adriana and Michael, the concern is that banks won’t use the freed-up capital for anything productive. They worry it’ll be used to increase shareholder returns or chase risky profits, exactly the kind of behavior the post-crisis rules were meant to stop. Adriana hasn’t released a full statement, but is aligned with Michael’s concerns on the direction of the rule. This isn’t the first time the eSLR has been in the crosshairs. Big banks have argued for years that it discourages them from holding US Treasurys, especially during periods of high demand. The Fed’s proposal now claims it is fixing that exact issue by reclassifying how low-risk inventory is handled. The rule tweak also aims to align the US framework with Basel standards, the global baseline for banking regulations. These international guidelines are meant to standardize how banks operate across borders, and the Fed says this change is part of aligning with that structure. Official documents released Wednesday point to that alignment as one of the driving reasons behind the proposal. 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