Banking Agencies Ease Capital Requirements

The Federal Reserve Board ("Fed"), Office of the Comptroller of the Currency ("OCC") and Federal Deposit Insurance Corporation ("FDIC") modified the enhanced supplementary leverage ratio ("eSLR") standards applicable to U.S. global systemically important bank holding companies ("GSIBs") and their depository institution subsidiaries.

The agencies jointly finalized amendments to:

1. Recalibrate the GSIB holding company buffer. The final rule sets the eSLR buffer to 50 percent of the firm's method 1 GSIB surcharge, replacing the current fixed 2 percent buffer.
2. Modify standards for depository institution subsidiaries. The rule eliminates the 6 percent "well capitalized" threshold under the prompt corrective action framework. This is replaced by an eSLR buffer equal to 50 percent of the parent GSIB's method 1 surcharge, capped at 1 percent.
3. Align TLAC and long-term debt requirements. The Board finalized conforming amendments to the leverage-based components of its total loss-absorbing capacity ("TLAC") and long-term debt requirements to align with the recalibrated eSLR buffer.

The final rule becomes effective on April 1, 2026, with an option for early adoption starting January 1, 2026.

While the agencies did not immediately comment, Fed Vice Chair for Supervision Michelle Bowman had previously warned that "the original calibration of the eSLR was based on forecasts of the level of reserves and other so-called 'safe assets' in the system that are now far out of line with current levels." (See previous coverage.)

Fed Governor Michael S. Barr stated that the final rule "unnecessarily and significantly" weakens bank-level capital and does little to improve Treasury market resilience, raising concerns that: (i) it cuts capital at GSIB bank subsidiaries by $219 billion and reduces TLAC and long-term debt requirements by $90 billion and $132 billion, respectively; (ii) it adds an unvetted 1% cap on the eSLR buffer that further weakens the capital backstop; (iii) it is unlikely to enhance Treasury market intermediation, as firms may use excess capital for shareholder returns or higher-yielding activities rather than market support; and (iv) it incentivizes firms to game risk-based requirements by relying solely on the less stringent Method 1 GSIB surcharge to justify deeper capital cuts.

Fed Governor Stephen I. Miran argued that the leverage ratio "should not be the binding constraint" on banks as it incentivizes higher-risk behavior. He expressed concern that the agencies missed an opportunity to make a "more lasting and thoughtful change" by excluding Treasurys and U.S. central bank reserves from the supplementary leverage ratio denominator. He contended that penalizing these riskless assets—which banks are required to hold for liquidity purposes—hinders dealer intermediation arguing that excluding them would help "insulate the Treasury market from stressful episodes."

Fed Governor Lisa D. Cook opposed the rule, citing the "economically significant reduction" in capital required at FDIC-insured bank subsidiaries of GSIBs. She noted that staff projected a 28 percent reduction in aggregate Tier 1 capital requirements for these subsidiaries and questioned whether holding company resources could be "seamlessly reallocated" to the bank level during periods of stress. She also argued that more analysis was needed regarding the "cumulative effects" of the final rule alongside anticipated changes to GSIB risk-based capital requirements to ensure the benefits outweigh the costs.