Banking Agencies Propose Rule to Ease Capital Requirements

The Federal Reserve Board ("Fed"), Office of the Comptroller of the Currency ("OCC") and Federal Deposit Insurance Corporation ("FDIC") requested comment on a proposed rule "to modify the enhanced supplementary leverage ratio ["eSLR"] standards applicable to ... global systemically important bank holding companies ("GSIBs") and their depository institution subsidiaries."

The agencies jointly proposed to: (i) recalibrate the eSLR buffer for GSIBs to 50 percent of the firm's method 1 GSIB surcharge, replacing the current fixed 2 percent buffer; (ii) apply the same 50 percent calibration to the eSLR standard for depository institution subsidiaries of GSIBs, replacing the current 6 percent "well capitalized" threshold under the prompt corrective action framework; (iii) revise the OCC's methodology for identifying which national banks and federal savings associations are subject to the eSLR standard to ensure it applies only to those that are GSIB subsidiaries, consistent with the agencies' "regulatory tailoring framework;" (iv) make conforming changes to the leverage-based components of the Board's total loss-absorbing capacity and long-term debt requirements, which currently rely on the fixed 2 percent buffer; and (v) make certain "technical corrections to the capital rule."

Fed Chair Jerome H. Powell explained that since the SLRs adoption, the financial environment has changed significantly. He highlighted that instead of the expected decline in bank reserves, reserves have grown substantially, as have Treasury holdings on bank balance sheets. He stated that this buildup of "low-risk assets" has made the leverage ratio "more binding" than originally intended, raising concerns that it may now disincentivize banks from engaging in "low-risk activities, such as Treasury market intermediation." He supported revisiting the calibration of the leverage ratio to reflect these shifts, emphasizing that the proposed changes remain aligned with the Basel Committee's framework.

Fed Vice Chair for Supervision Michelle W. Bowman argued that the eSLR has become "a binding constraint rather than a backstop," discouraging low-risk activities like Treasury intermediation. She supported replacing fixed buffers with a dynamic approach tied to each G-SIB's Method 1 surcharge to better align with Basel standards and ease pressure during stress. She emphasized that the change wouldn't boost shareholder payouts, as holding companies remain bound by risk-based requirements and support obligations. She called the proposal "an important first step" and welcomed feedback on alternatives, including excluding certain Treasuries or reserves from the SLR denominator.

Fed Governor Michael S. Barr warned that the proposal would undermine financial stability without delivering meaningful benefits to Treasury market functioning. He raised concerns that the proposal: (i) substantially lowers the amount of capital large banks are required to hold; (ii) slashes the eSLR "nearly three-fold" compared with the 2018 draft and carves an extra $65 billion from GSIBs' Tier 1 capital; (iii) is unlikely to meaningfully improve banks' role in the Treasury market, particularly during periods of financial stress; and (iv) "erodes the transparency of the capital backstop" by tying the leverage ratio to a risk-based GSIB surcharge and relying on Method 1 solely to justify deeper capital cuts. He said the proposal "puts our banking system at risk," but signaled he is open to a more modest eSLR revision if paired with full Basel III implementation.

Fed Governor Adriana D. Kugler supported revising the eSLR calculation for G-SIB holding companies to avoid discouraging low-risk activities like Treasury market intermediation. She opposed the broader proposal because it includes a 27 percent reduction in Tier 1 capital requirements for G-SIB bank subsidiaries—a change she believes could increase systemic risk. She argued that banks are not the primary intermediaries in Treasury markets, and that shifting capital away from bank subsidiaries could leave them vulnerable during financial stress. She also cautioned against making isolated changes to leverage ratios without considering pending reforms like Basel III and stress testing. She also emphasized the need for a more holistic approach to capital regulation.

Fed Governor Christopher J. Waller argued that while leverage ratios play an important role in ensuring bank safety, the current eSLR is often a binding capital requirement rather than a backstop. He stated that this miscalibration can discourage banks from holding lower-risk assets—such as Treasuries—by treating them the same as high-risk assets under the leverage ratio. He highlighted that this has broader implications for financial stability, especially in times of stress when large banks are constrained from supporting markets like the Treasury market. He said he favors reducing the degree to which the eSLR binds over excluding specific assets from its calculation and emphasized that regulators should not favor certain assets over others. He also argued that banks should manage their own risks.