Small Banks Warn Fed on Plan to Relax Limits on Wall Street

By Jeff Bater

Smaller lenders might suffer under a Trump administration proposal to relax leverage limits for Wall Street banks, industry and state regulators said.

Comment letters due this week on the plan from the Federal Reserve and the Office of the Comptroller of the Currency warned about its implications for financial stability.

The Conference of State Bank Supervisors, in a letter released June 26, expressed concern the proposal could hurt community banks and other lenders by providing the global systemically important banks (G-SIBs) with “significantly greater flexibility in deposit pricing.”

“Given the significant deposit market share of most of the U.S. G-SIBs, the increased deposit pricing flexibility could intensify deposit competition and result in heightened liquidity risks and funding stress for the rest of the banking industry,” the CSBS said.

The Fed and the OCC asked for input from industry in April on a plan to adjust the enhanced supplementary leverage ratio. The requirement covering banks such as JPMorgan Chase & Co. and Wells Fargo & Co. calls for maintaining a minimum level of capital against all their assets so they can better withstand losses.

The regulators’ April 11 proposal would scrap the existing method for measuring each bank’s borrowing limits and instead tailor restrictions to the risks posed by specific firms. Regulators estimate the plan would free up a modest $400 million among the biggest banks’ holding companies.

Financial Stability

The CSBS, which represents state regulators, said any revisions to the leverage limits have “significant implications for financial stability and the resiliency of the U.S. banking industry.”

Reducing capital levels of the megabanks would make them “more likely to fail and therefore would put the entire banking system at risk of another financial meltdown,” the Independent Community Bankers of America said in a June 12 letter.

Appropriate requirements are needed to avoid over-leveraging, the U.S. Chamber of Commerce said. But its May 21 letter warned that too-strict standards can have serious, unintended consequences.

“Allowing suitable levels of risk-taking is a necessary element needed to fuel growth and innovation within the overall economy,” the chamber wrote.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bloomberglaw.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com

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