The Federal Reserve will let a regulatory break for banks expire.

The Federal Reserve will let a regulatory break for banks expire.

The Federal Reserve will let a regulatory break for banks expire.

The Federal Reserve will let a regulatory break for banks expire.

The Federal Reserve announced on Friday that it would allow a regulatory change that dictates the amount of capital banks must keep in reserve to expire as planned on March 31, while opening the door to future tweaks if they are deemed necessary to keeping essential markets functioning smoothly.

The Fed introduced the soon-to-expire regulatory change last year. It allows banks to exclude both their Treasury securities holdings and their reserves — which are deposits at the Fed — when calculating a key regulatory measure called the supplementary leverage ratio.

The goal was to make it easier for the financial institutions to absorb government bonds and reserves and still continue lending. Otherwise, banks might have stopped such activities to avoid increasing their assets and hitting the leverage cap, which would mean having to raise capital — a move that would be costly for them.

The change came at a tough time in the Treasury bond market, and it was meant to both ease trading conditions and keep banks lending. But it also lowered bank capital requirements, which drew criticism.

As a result, the debate over whether to extend the exemptions had been a heated one.

Bank lobbyists and some market analysts have argued that the Fed needed to keep the exemption in place to prevent banks from pulling back from both lending and their role as key bond buyers and sellers. But lawmakers and researchers who favor stricter bank oversight argued that the exemption chipped away at the protective cash buffer that banks had built up in the wake of the financial crisis, leaving them less prepared to handle shocks.

The decision the Fed made took a middle road: It both ended the exemption and opened the door to future changes to how the leverage ratio, which banks have long opposed, is calibrated. The goal is to keep capital levels stable, but also to make sure that growth in government securities and reserves on bank balance sheets — a natural side effect of government spending and the Fed’s own policies — does not prod them to pull back.

“Because of recent growth in the supply of central bank reserves and the issuance of Treasury securities, the Board may need to address the current design and calibration of the SLR over time,” the Fed said in its release, adding that the goal would be “to prevent strains from developing that could both constrain economic growth and undermine financial stability.”

The Fed said that it would “shortly seek comment” on measures to adjust the leverage ratio. And it said that it would make sure that any changes “do not erode the overall strength of bank capital requirements.”


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