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Wall Street Lending Could Rise by Billions in U.S. Proposal

(Bloomberg) -- U.S. regulators are poised to ease leverage limits for Wall Street banks, potentially freeing up tens of billions of dollars for lending and other business activities in the latest move to relax post-crisis financial rules that the Trump administration blames for stifling growth.

In its second major proposal this week, the Federal Reserve -- along with the Office of the Comptroller of the Currency -- said Wednesday that it wants to scrap an existing method for measuring each bank’s borrowing limits and instead tailor restrictions to the risks posed by specific firms.

While the regulators estimate the change would free up a modest $400 million among the biggest banks’ holding companies -- which the firms could give back to shareholders or use to buy back stock -- the overall effect is more dramatic. The agencies said the amount of capital that lenders are required to maintain in their main subsidiaries might fall by a whopping $121 billion -- potentially giving banks such as Wells Fargo & Co. and Bank of America Corp. significant flexibility to boost lending.

At issue is what’s known as the leverage-ratio rule -- a requirement that U.S. banks maintain a minimum level of capital against all their assets so they can better withstand losses.

FDIC Opposition

The proposal “would further tailor leverage ratio requirements to the business activities and risk profiles of the largest domestic firms,” the Fed and OCC said in a statement. The agencies will accept public comments on the proposed rule for 30 days.

Fed and OCC staffers have been working for months to better align the leverage ratio with a recent global agreement at the Basel Committee on Banking Supervision. The effort drew opposition from the Federal Deposit Insurance Corp., a banking regulator that is still led by a Barack Obama appointee.

The leverage ratio rule was “among the most important post-crisis reforms,” FDIC Chairman Martin Gruenberg said in a Wednesday statement. Citing the estimated $121 billion reduction in capital for the eight banks affected, he said the “FDIC did not join the Federal Reserve and the OCC in issuing the proposed rule.”

Excessive Borrowing

Established in the wake of the 2008 financial crisis, the leverage ratio is meant to evaluate whether a bank is getting overextended in its borrowing. Wednesday’s proposal would throw out a fixed part of the calculation for some of the largest banks and replace it with a threshold directly tied to each institution’s so-called risk-based capital “surcharge,” which varies based on its size and complexity. The effect will generally ease capital demands, especially for the less-risky custody banks: Bank of New York Mellon Corp. and State Street Corp.

The regulators have also had to contend with a parallel effort from Congress that would revamp how the rule handles the custody banks.

“The big banks have been anticipating this for a while, since Fed officials have been talking about tweaking the leverage ratio for many months,” said Ian Katz, an analyst with Capital Alpha Partners in Washington. “The banks weren’t expecting a game-changer, but this might turn out to be a little better than what they expected.”

Brainard Opposition

The Fed’s vote was 2-to-1, with opposition from Governor Lael Brainard, who has argued against easing capital and liquidity demands at a time when “credit growth and profitability in the U.S. banking system are robust.”

“During the 2008 crisis leverage capital was by far the best protection against bank failure,” said Marcus Stanley, policy director at Americans for Financial Reform, who said this “short-sighted and irresponsible” maneuver is playing into Wall Street’s agenda. “Now federal regulators are slashing leverage capital requirements at the largest U.S. banks by over $100 billion, matching levels required in the much weaker European banking system.”

On Tuesday, the agency also proposed an overhaul of its risk-based capital rules to better align them with its annual stress tests of banks -- and to tailor capital demands to each bank’s business.

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