Regulators taking another look at costs of Wall St. safety rule

Mon Oct 24, 2016 3:27pm EDT
 
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By Patrick Rucker and Jonathan Spicer

WASHINGTON/NEW YORK (Reuters) - Just as memories of the financial crisis are fading and tough new banking regulations are beginning to bite, some current and former regulators wonder whether one of the rules is too much of a burden for markets and taxpayers.

At issue is the requirement that the largest U.S. banks set aside $6 of capital for every $100 of assets on their books - double what they had to hold before.

Because this so-called Supplementary Leverage Ratio (SLR) rule applies to all bank assets including Treasuries, it has made owning that ultra-safe government debt and related trades more expensive.

Wall Street has complained about costs of many measures designed to make the financial system safer, but regulators have been firm. However, when banks argue that the SLR, which came into force early last year, unnecessarily burdens short-term financing, current and former officials say they may have a point.

"It has turned out to be quantitatively more of a problem than some people had anticipated," said Jeremy Stein, who was a Fed governor when the supplementary leverage ratio was adopted. Stein left the central bank for Harvard University in 2014.

Any softening of the regulation could signal that, nearly a decade after Wall Street's meltdown sparked a global recession, a safety-first approach may be giving way to a more nuanced one where costs play a greater role in regulators' considerations.

Privately, some regulators are now asking themselves whether the cost of complying with the rule may diminish its benefits, according to people familiar with internal discussions. The Federal Reserve and other central banks are analyzing the rule and its impacts.

The Fed and other U.S. bank supervisors acknowledge that some short-term lending has disappeared since the rule's introduction. They differ, though, over how much SLR should be blamed and whether any adjustments are needed.   Continued...

 
People sit outside the New York Stock Exchange (NYSE) during the morning commute in New York City, U.S., September 15, 2016.  REUTERS/Brendan McDermid - RTSNWHN