MNI: Fed's Quarles Urges Leverage Ratio Reform

Outgoing Fed regulation chief Randal Quarles on Thursday urged U.S. regulators to recalibrate leverage capital requirements that have become overly restrictive for large banks, citing "perverse implications" such as disrupting Treasuries trading in times of stress.

"Supervised firms are increasingly being constrained by the supplementary leverage ratio not for any of these valid reasons, but simply because of a rise in the level of safe assets in the U.S. financial system," said in remarks prepared for an American Enterprise Institute event. "If we enter another crisis with this issue unaddressed, the leverage ratio fundamentalists will have much to answer for."

The best way to address the problem for the enhanced supplementary leverage ratio that applies to U.S. global systemically important banks is to recalibrate the fixed 2% eSLR buffer requirement to equal 50% of the applicable G-SIB capital surcharge, with corresponding recalibration at the bank level, he said. The approach was endorsed by the Basel Committee, proposed by the Fed and OCC but never finalized.

Excluding just reserves or reserves and Treasuries from the SLR calculation "could result in a significant lowering of capital levels and exacerbate the incentive for the banking system to prefer funding the government to funding private enterprise," he said, a less preferred solution.

MNI has reported that Quarles's successor will need to compensate for any loosening of SLR rules by tightening requirements elsewhere, perhaps by raising a risk-adjusted capital buffer.