Rule for eight banks may be weakened
WASHINGTON» The Federal Reserve has proposed new rules that would allow eight of the biggest Wall Street firms to collectively lower by about $121 billion the capital cushions their banking subsidiaries are required to hold against a collapse, according to federal banking regulators.
Critics of the plan say it would dangerously weaken a rule put in place after the global financial crisis and intended to ensure that banks have big-enough stockpiles of safe capital to survive a panic.
The banks say the new rule would give them greater flexibility but would not lead to riskier investment decisions.
Earlier this month, the Fed unveiled a plan to modify rules on what capital banks must hold on reserve in case their assets fail. The proposal would weaken one capital requirement tailored specifically to ensure the solvency of the eight Wall Street companies deemed most essential to the world financial system the type of institutions whose sudden failure could do severe damage to the economy as a whole.
The rule acts as an additional safeguard above the other capital requirements that apply to a much broader range of Wall Street banks and that would not be weakened by the Fed’s new proposals.
The eight institutions it covers — the six biggest Wall Street banks and two “custodian banks,” responsible for holding safe assets — have pushed for the rule to be loosened. They say other banking rules ensure that they have big enough cushions against collapse and argue that the restriction limits lending that would help private-sector growth.
The proposed rollback of this capital requirement called the “enhanced supplementary leverage ratio” - comes as lawmakers move in multiple other ways to overhaul the banking oversight rules that President Barack Obama helped install after the 2008 banking crisis helped trigger a global recession.
Last month, the Senate passed a bipartisan banking plan, over the objections of progressive Democrats, that would exempt banks with assets between $50 billion and $250 billion from the highest levels of scrutiny by the Fed.
It also would repeal or pull back other regulations created by the Dodd-Frank Wall Street Reform and Consumer Protection Act. House Republicans are now negotiating changes to a companion measure passed in the House.