Members of Congress Urge Fed, OCC to Rethink Leverage Ratios
Commentary by Sebastian Souchet
A bipartisan group of House Financial Services Committee members pressed the Federal Reserve and OCC to move forward with long-promised reforms to bank leverage ratios that are constraining liquidity in the US Treasury market.
In a letter to Federal Reserve Chair Jerome Powell and Acting Comptroller of the Currency Rodney Hood, Representatives Andy Barr, Bill Foster, Ann Wagner, and Brad Sherman asked for clarification on plans to reform the Supplementary Leverage Ratio ("SLR"), Enhanced Supplementary Leverage Ratio ("eSLR") and Tier One Leverage Ratio ("T1L"). The lawmakers argued that these requirements are now a binding constraint on large Treasury market intermediaries, discouraging them from holding Treasuries and other low-risk assets on their balance sheets and increasing US government borrowing costs.
The Committee members noted that in 2018 the Federal Reserve and OCC proposed an eSLR rulemaking to better align leverage ratios with risk-based capital requirements, but no final rule was issued. (See related coverage.) They also pointed to the Federal Reserve's 2020 action to temporarily exempt Treasuries and central bank deposits from leverage calculations, (see related coverage) and Chair Powell's February 2025 testimony acknowledging that "[i]t's time to move on the eSLR." They asserted that the Fed has not followed through, even as its balance sheet and banking sector assets doubled since 2020.
Citing research from the Federal Reserve Bank of New York warning that Treasury market functioning has been "challenged in recent years," the lawmakers expressed concern that existing leverage rules are aggravating current market stresses. They warned that elevated interest rates and rising US debt make improved Treasury market liquidity even more urgent.
The legislators asked the Federal Reserve and OCC to provide written responses by June 26, 2025, detailing (i) what specific adjustments to the SLR, eSLR and T1L are under consideration; (ii) the expected impact of such changes on Treasury market liquidity and stability; (iii) any additional measures under consideration to improve Treasury market resilience and how these coordinate with Treasury Department and SEC efforts; and (iv) the agencies' timeline for proposing and finalizing these reforms.
Commentary
The bipartisan letter is particularly timely given: (i) recent remarks from Vice Chair Bowman identifying, among other things, leverage capital requirements as an area requiring review and recalibration (see coverage); (ii) Acting OCC Comptroller Hood's June 2025 speech stating that the OCC is "examining adjustments to the [SLR] to ensure it functions as a true backstop—not a primary constraint that limits lending unnecessarily"; and (iii) that the FDIC recently submitted a draft rule to the Office of Information and Regulatory Affairs that would modify the SLR. Taken together, it appears that a joint rulemaking proposal modifying leverage capital requirements is forthcoming.
Various policy proposals have been put forth regarding reform of leverage capital requirements. Such proposals include: (i) excluding Treasury securities and central bank reserves from leverage ratios, consistent with the FRB's 2020-2021 temporary exemption; and (ii) making the eSLR countercyclical (i.e., eSLR requirements would decrease in times of market stress, but would incrementally ratchet back up as markets returned to normal). Notably, the letter makes reference to a 2018 proposal from the FRB and OCC that was aimed at "better align[ing] the [SLR] and [eSLR] with risk-based capital requirements." Though it was never finalized, the 2018 proposal would have, among other things, tied a G-SIB's eSLR requirements to the G-SIB surcharge, replacing each G-SIB's 2% leverage buffer with a leverage buffer set equal to 50% of the firm's surcharge as determined according to the FRB's G-SIB surcharge methodologies. In so doing, the 2018 proposal calibrated a G-SIB's leverage buffer with its systemic footprint as measured via the G-SIB surcharge. Given the variety of proposals, query what approach the federal banking regulators will ultimately take with respect to modifications of the leverage capital requirements.