JPMorgan, Wells Fargo lead big bank rally on reports of easing regulation
The enhanced supplementary leverage ratio is said to be getting less supple.
Banks are on the rise after Bloomberg reported that the US is planning to reduce capital requirements for the nation’s biggest financial institutions.
Banking behemoths have had to hold more so-called Tier 1 Capital (like equity and retained earnings that could be used absorb potential losses) as a share of their total leverage. This metric, known as the enhanced supplementary leverage ratio (or eSLR), is said to be going down from 5% to a range of 3.5% to 4.5%.
The likes of JPMorgan and Wells Fargo are up about 2%; every member of the KBW Bank Index is up at least 1%.
The thinking, or hope, around this is that banks would be freed up to hold or at least be more active intermediaries in US Treasurys as issuance continues to swell. But at the most basic level, watering down capital requirements increases potential profit-making opportunities.
But wait, you might ask, didn’t banks being chock-full of US Treasurys with massive mark-to-market losses play a key role in spurring a mini crisis back in 2023? Well, yes. That happened.
However, the financial institutions that came under the most stress in that scenario were smaller banks (not subject to the eSLR to begin with) and often crypto-linked, California-based, or both. Moreover, it’s difficult to plan for and live in a world of a persistently, severely inverted yield curve in which banks are paying out the nose for deposits while generating much less than that from their purportedly safe asset holdings.
Moreover, regulators have been tiptoeing in the direction of increasing the so-called moneyness of Treasurys (which I’d define as swift convertibility of UST to USD at par), and crossed that Rubicon by enacting the Bank Term Lending Facility during that aforementioned 2023 kerfuffle.
It’s a really delicate balance to strike in markets: financial crises usually arise when something that everyone thinks is ultrasafe turns out to be risky. There is a public interest in making sure that risk and the potential for loss is priced appropriately by financial institutions. On the other hand, there’s also a public interest in making US government debt the safest asset it can be.
