MNI BRIEF: Bank Regulators To Propose SLR Reform - Bowman

U.S. bank regulators will soon propose reforms to the supplementary leverage ratio to ensure it acts as a backstop to risk-based capital requirements rather than a binding constraint that creates market distortions, Michelle Bowman, the Fed's new head of regulation, said Friday. 

"The original calibration of the eSLR was based on forecasts of the level of reserves and other so-called 'safe assets' in the system that are now far out of line with current levels," she said, referring to the enhanced SLR applicable to the largest banks. 

"I expect that in the near future, the agencies will publish a proposal to help address this concern and ensure that the eSLR resumes functioning as a backstop capital requirement." 

Regulators need to consider capital reform in the aggregate and all components work together effectively, Bowman said, adding the Fed is hosting a conference in July to discuss SLR, stress testing, potential reforms to the GSIB surcharge and the Basel III capital requirements. 

"Over-calibrated capital requirements effectively create market distortions, disfavoring some activities over others in a way that is divorced from prudential safety and soundness goals and economic conditions," she said. 

As a result of the leverage requirement, "banks are less inclined to engage in low-risk activities like Treasury market intermediation and revise their business activities in a way that is neither justified nor responsive to their customer needs. These distortions can also create broader financial system impacts like increased stress on Treasury market functioning," she said.