The Federal Reserve and the Office of the Comptroller of the Currency today unveiled a series of proposed changes to the enhanced supplementary leverage ratio standards for the largest banks, although support for the revisions was not unanimous among Fed board members.
The Fed board voted 5-2 in favor of a notice of proposed rulemaking issued jointly with the OCC, with the FDIC expected to join at a board meeting scheduled for tomorrow. According to a Fed staff summary of the proposal, the changes are meant to ensure SLR requirements serve as a backstop to risk-based capital requirements rather than as a regularly binding constraint. For U.S. global systemically important banks, the proposal would replace the current 2% eSLR buffer with a buffer equal to half of the GSIB’s Method 1 surcharge. For GSIB bank subsidiaries, the proposal replaces the 3% eSLR buffer with a buffer also half of the GSIB’s Method 1 surcharge.
The proposal would not exclude holdings of Treasury securities and deposits at Fed banks from the SLR calculation, as regulators did on a temporary basis during the COVID-19 pandemic. However, it seeks public input on “reasonable alternatives” to the proposal, including excluding from the denominator Treasuries held for trading at broker-dealer affiliates, or excluding all U.S. Treasuries and reserves from the SLR denominator.
“Today’s proposal is an important first step in balancing the stability of the financial system and Treasury market resilience, while preserving safety and soundness and restoring the eSLR as a backstop,” said Vice Chair for Supervision Michelle Bowman.
“The proposal would better tailor our capital requirements for banks to ensure the enhanced supplementary leverage ratio functions as a true backstop — not a primary constraint that limits lending unnecessarily,” Acting Comptroller Rodney Hood said. “The proposal aligns with my commitment that the capital framework should support resilience but does not constrain growth.”
Fed board division
Fed Chairman Jerome Powell supported the proposal, noting that the SLR was adopted in the aftermath of the global financial crisis. Times have changed and the Fed should reconsider its original approach, he said.
“When the board originally approved the SLR — and the enhanced SLR, or eSLR, for our largest banks — we expected reserves in the banking system to substantially decline in the following years,” he said. “Instead, we have seen bank reserves increase substantially. We also have seen Treasury holdings in the banking system climb precipitously. This stark increase in the amount of relatively safe and low-risk assets on bank balance sheets over the past decade or so has resulted in the leverage ratio becoming more binding.”
Governors Michael Barr and Adrianna Kugler voted against the notice of proposed rulemaking. In explaining his opposition, Barr was skeptical that the proposal would achieve the stated objective of improving the resiliency of the Treasury market. He would instead support a “much more modest adjustment to the eSLR,”
“This proposal puts our banking system at risk by weakening capital of the largest banking organizations,” Barr said. “Despite my reservations, I remain open to working towards a much more modest eSLR reform if paired with Basel III implementation.”
ABA response
The proposal is an important step toward strengthening our financial system, reducing bank funding costs and allowing institutions to do even more to support the economy without compromising safety and soundness, American Bankers Association President and CEO Rob Nichols said in a statement.
“Importantly, this proposal also invites comment on changing the treatment of U.S. Treasury securities which would increase liquidity in the Treasury market and promote financial stability,” he added.
“This proposal also underscores the broader importance of regulatory tailoring while addressing longstanding issues that have made it harder for our nation’s internationally active banks to compete with their European counterparts,” Nichols said. “A more risk-sensitive and proportionate approach to capital standards for all banks is essential to maintaining a safe, dynamic and competitive banking system. That includes reducing the Community Bank Leverage Ratio to 8% to ensure that community banks can continue using this simplified framework while serving customers and communities across the country. We continue to call for additional leverage ratio reforms, including excluding U.S. Treasury securities from both the Supplementary and Tier 1 Leverage Ratios.”
