U.S. Pondering Derevision of Financial Regulations Imposed Post-2008 Economic Collapse

U.S. Pondering Derevision of Financial Regulations Imposed Post-2008 Economic Collapse

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Get ready for a game changer, folks! Sources hint that the White House is gearing up to announce one of the biggest capital requirement cuts for banks in the past decade, as part of President Trump's push for financial deregulation.

If the speculations pan out, U.S. regulators could slash the supplementary leverage ratio (SLR) for big banks in the near future. This rule, implemented post-financial crisis, demands banks to keep a specific quantity of high-quality assets relative to their overall leverage.

Critics voice concerns, claiming this norm essentially punishes lenders for hoarding low-risk assets like Treasury bonds. They argue that it impedes trading activity in the whopping $29 trillion government bond market and worsens lending.

As Greg Baer, Bank Policy Institute's CEO puts it, "Imposing penalties on banks for holding safe assets like Treasury bonds undermines their ability to maintain market fluidity during financial turbulence—the very times when it's most crucial."

Analysts suggest that this SLR cut could work wonders for Treasury bonds and potentially help Trump realize his dream of cutting borrowing costs. Lenders could purchase more government bonds, potentially reducing borrowing rates.

Presently, the top eight American banks need to maintain a Tier 1 capital ratio of at least 5% of their total leverage. Overseas, requirements are less strict, ranging from 3.5% to 4.25% for major European, Chinese, Canadian, and Japanese banks.

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USA, Banks, Crisis

Detailed Implications

While the SLR reduction has its merits, there could be a few potentially negative consequences:

Positive Aspects

1. Boosted Credit Access: By slashing the SLR, banks may be in a position to lend more, with less stringent capital requirements against less risky assets like U.S. Treasuries[2][4].
2. Strengthened Market Fluidity: Banks will be better-equipped to shore up market liquidity during tough times, as they can stockpile more low-risk assets without incurring penalties[4].
3. Improved Flexibility for Banks: Lower capital requirements could endow banks with more leeway to engage in assorted financial activities, including bonds buying[2].

Potential Pitfalls

1. Heightened Risk Exposure: Cutting the SLR might lead to increased risk exposure for banks. With fewer capital requirements against assets, banks could take on more debt and risk, potentially destabilizing the financial system[2].
2. Volatility Amplification: Critics claim this deregulation could increase market volatility, especially during rough economic times, as banks could overextend themselves[2].
3. Regulatory Doubts: Some argue that this move could be premature given recent market fluctuations and regulatory obstacles, potentially eroding the gains made since the 2008 financial crisis[2][4].

Regulatory and Policy Background

The SLR cut forms part of a broader deregulatory agenda, mirroring the administration's push for innovation and lower regulatory hurdles[5]. This move mirrors the banking industry's long-standing lobbying endeavors against the rule, which they claim affects their ability to support key markets[3][4].

1. The reduction in the supplementary leverage ratio (SLR) could lead to enhanced financial flexibility for banks, enabling them to engage in diverse financial activities, such as purchasing more government bonds, possibly reducing borrowing rates.
2. Conversely, easing the SLR standards may pose potential risks, notably an increase in banks' risk exposure, market volatility amplification, and questions regarding regulatory timing and challenges.

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