Federal Reserve President Steve Milan is calling for a complete reset of Wall Street banking rules. In a speech with the Banking Policy Institute on Wednesday, Steve said the Fed needs to revise its entire post-crisis framework before wasting time debating its balance sheet and how much interest it pays on reserves.
“For many years, financial regulation has largely gone in one direction, with increasing restrictions on the banking sector,” Steve said. He noted that the impact of these rules on markets, credit and monetary policy is too often ignored.
He believes that this overregulation has completely pushed traditional banking activities out of the regulatory realm. He added: “I have no bias against non-bank financial companies, but credit allocation should be driven by market forces, not regulatory arbitrage.”
Steve says regulations have gone too far since 2008.
Steve too said After the 2008 financial crisis, banking rulebooks were overleveraged. Now, more than a decade later, the pendulum has swung too far. “Regulators should resist the urge to overreact,” he warned.
His view is that stricter capital controls, especially regulations such as enhanced supplementary leverage ratios, have pushed core lending activities into the shadows and beyond formal oversight.
The rules are part of broader global Basel III capital standards and are intended to act as a backstop to normal risk-based capital rules. But now it’s under fire. Steve isn’t the only one sounding the alarm.
Other officials backed by President Trump and some bank leaders are also calling for the policy to be loosened. Their argument is that the rule penalizes banks that hold low-risk assets like U.S. Treasuries.
Bloomberg reported this week that the Federal Reserve and other major regulators submitted final plans to revise leverage ratios to the White House.
The update means major U.S. banks, including JPMorgan, Bank of America and Goldman Sachs, will hold less capital relative to their total assets. This is largely in line with the proposal submitted in June, but not everyone got what they wanted.
Some banks have unsuccessfully attempted to exclude U.S. Treasuries from their ratio calculations altogether.
U.S. Treasuries Outperform Swaps as New Rules Advance
News of the planned changes moved the market rapidly. U.S. Treasuries outperformed interest rate swaps, a competing fixed income product, after Bloomberg reported on Tuesday.
The spread between 5-year and 10-year bond yields and swap rates narrowed to the lowest level since March. Traders took this as a green light for banks to pile up U.S. Treasuries.
Officials still aim to finalize the rule changes “in the coming weeks,” subject to White House approval. But that could change. Nothing is locked yet. And it’s clear that not all of Wall Street’s demands were reflected in the draft.
That said, Steve believes the Fed needs to continue to focus on rewriting the entire regulatory structure before returning to balance sheet discussions and reserve management.
He also called for greater transparency from the Fed itself. In his words, both the public and the banking industry benefit from knowing what the Fed is doing and why.
At the moment, Steve argued, most of the effects of regulation are invisible until something breaks. That’s not enough anymore.
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