US regulators are looking to bolster big banks' roles as Treasury market intermediaries by reducing a key capital buffer, but the financial institutions will likely devote most of the windfall to buying back shares, Morningstar Senior Equity Analyst Suryansh Sharma told MT Newswires.

The Federal Reserve will convene Wednesday to discuss plans to roll back the supplementary leverage ratio, or SLR. The meeting will revolve around reducing the enhanced SLR, or ESLR, that applies to the eight US banks deemed systemically important: Bank of America (BAC), Bank of New York Mellon (BK), Citigroup (C), Goldman Sachs (GS), JPMorgan Chase (JPM), Morgan Stanley (MS), State Street (STT) and Wells Fargo (WFC), Bloomberg reported June 18, citing people briefed on the discussions.

All US banking organizations are required to maintain a minimum leverage ratio of 4% or 5% to be considered "well capitalized." Banks with more than $250 billion in assets are required to maintain an additional SLR of 3%, while the eight global systemically important banks, or G-SIBS, must maintain an additional ESLR of 5%. Regulators will discuss reducing the ESLR to a range of 3.5% to 4.5%, according to the Bloomberg report.

The goal is to spur G-SIBs to buy more Treasuries and help calm bouts of market turmoil witnessed in the wake of President Donald Trump's April 2 tariff announcement and heightened concern over the country's debt load. Should bank regulators follow through on the reported plan, it will likely result in a marginal uptick in demand for Treasuries among the G-SIBs, while most of the benefit will go toward stock repurchases, Morningstar's Sharma said in an email.

"I am more inclined to say that banks will use lower capital requirements to do more buybacks," Sharma said. "It should help with improving Treasury liquidity and should be helpful on an operational level, but in my opinion, it would not materially impact the long-term demand for Treasuries from US banks."

The ESLR is non-binding for the four G-SIBS in Sharma's coverage area -- JPMorgan, Bank of America, Wells Fargo and Citi -- meaning they are already comfortably above the required ratio, so the impact of an ESLR reduction "on all four should be minimal in my opinion," he said.

Sean Dunlop, a director for Morningstar, told MT Newswires that for the two GSIBs in his purview, Morgan Stanley and Goldman Sachs, the changes to the SLR likely won't mean much. Those banks are usually more inhibited by Common Equity Tier 1 requirements, he said.

Easing the regulatory burden on banks is a step in the right direction after years of stricter rules and heightened capital requirements, Sharma said.

"I think the current capital regulations/requirements are a bit excessive," he said. "I do not see a reduction in ESLR being a cause of concern for financial stability."