Wall Street's guardrails are going away

Christmas is coming in July for big banks.

The Federal Reserve’s board voted yesterday to greenlight a proposal that would lower the enhanced supplementary ratio. While that may sound like a term for something you could achieve in Fortnite, it’s actually a measure of how much capital a bank must hold against its other assets.

Right now, all banks have to hold at least 3% of capital against their assets, while big banks like JPMorgan and Citi have to hold 5%. By dropping the ratio, banks could utilize some of that capital for dealmaking, or to allow global banks to buy more Treasury assets.

Loosening these financial regulations would be a boon to the financial services industry, and the mere thought of it drove bank stocks higher today.

We’ve seen this film before

All this talk about removing rules reminds us of a big kerfuffle over a decade ago that some of you may recall: the global financial crisis. The supplementary leverage ratio was put in place to provide a capital backstop in order to prevent another series of bank failures after the 2008 implosion.

Five Fed officials voted in favor of the proposal to loosen regulations, while two voted against it. Michael Barr, one of the two who voted against, argued that lowering the ratio “would significantly increase the risk” of a bank failure.

Yet others argued that the ratio prevents banks from investing in less risky assets such as Treasuries. Fed Chair Jerome Powell is another ally of the proposal, arguing that it’s no longer necessary since it was first put in place a decade ago.

This move is just the latest push from the Trump administration to eliminate long-standing regulations on Wall Street, including ending annual stress tests and changing the rating system for banks.

Maybe President Trump is just hoping he can get a part in The Big Short sequel.—LB