The US Treasury Department was the target of a Chinese cyberattack in 2024
AFP

U.S. banking regulators have unveiled a proposal to ease capital requirements on large financial institutions in an effort to bolster liquidity in the Treasury market, which has shown signs of strain in recent months.

The proposal targets the enhanced supplementary leverage ratio (eSLR)—a post-2008 financial crisis safeguard that requires the largest banks to hold a set percentage of capital against all assets, including low-risk ones like U.S. Treasuries. Under the revised rule, banks would be permitted to temporarily exclude certain high-quality assets, such as Treasuries and central bank reserves, from the calculation. As reported by the Financial Times, the goal is to reduce disincentives for banks to act as intermediaries in the U.S. government bond market, especially during periods of stress.

The move comes amid increased volatility in the Treasury market, driven by fiscal policy uncertainty, including repeated standoffs over the debt ceiling and speculation about future Federal Reserve interest rate cuts. According to the Wall Street Journal, regulators—including the Federal Reserve, FDIC, and OCC—believe relaxing the leverage rule could enhance banks' capacity to absorb and distribute Treasuries, ultimately supporting price stability and smoother rate movements.

While industry leaders welcomed the proposal as a step toward modernizing capital rules, critics warn it could inadvertently raise systemic risks. Financial reform advocates argue that loosening capital buffers could make the banking system more vulnerable during future downturns.

"This is a clear signal of regulatory retrenchment," said a senior analyst at a Washington-based watchdog group. "It's the first meaningful rollback of Dodd-Frank-era safeguards in over a decade."

The proposed rule is now open for public comment through August, with final implementation potentially slated for late 2025. If adopted, the measure would represent a significant policy shift, highlighting the balance regulators are trying to strike between financial stability and market functionality.