Federal Reserve Approves Plan to Reform Leverage Ratio for Large Banks

On June 25, 2025, the Federal Reserve Board approved a proposal to reform the enhanced supplementary leverage ratio (eSLR) for large global banks, aiming to bolster their participation in the U.S. Treasury markets. The proposal was approved by a 5-2 vote, with Fed Governors Adriana Kugler and Michael Barr dissenting.

The eSLR, established in 2014 as part of the Basel III reforms, requires large banks to hold a minimum of 5% capital against their total leverage exposure, which includes all assets and off-balance-sheet items, regardless of risk. This regulation was designed to ensure that banks maintain a strong capital base to absorb potential losses.

The Federal Reserve's proposal seeks to link capital requirements more directly to a bank’s role in the global financial system, replacing the flat percentage rule currently used. This change is intended to mitigate constraints imposed by current leverage rules, particularly as government debt levels rise, and to encourage banks to engage more actively in Treasury trading during market stresses. The proposed changes could lower capital requirements at depository subsidiaries by 27%, equivalent to $213 billion, although holding companies would still face overall constraints.

The banking sector has welcomed the proposed relief, arguing that the current leverage requirements have become an unnecessary constraint rather than serving their original purpose as a financial safeguard. However, some analysts have expressed caution about potential risks. Fed Governors Adriana Kugler and Michael Barr opposed the proposal, citing concerns over reduced capital buffers and limited projected benefits. Chairman Jerome Powell supported the initiative as a prudent update reflecting increased holdings of low-risk assets.

In April 2020, the Federal Reserve temporarily excluded U.S. Treasury securities from the SLR denominator for bank holding companies. This move was a response to significant balance sheet expansion driven by monetary and fiscal interventions during the pandemic, as banks absorbed deposits and intermediate Treasuries in strained markets. However, this exclusion expired in March 2021, and while regulators have suggested a review of the SLR’s long-term calibration, no permanent changes have yet been made.

In February 2025, Federal Reserve Chair Jerome Powell expressed support for revisiting the eSLR, noting that the quantity of Treasuries had grown significantly, while the capital allocated to intermediating trades and Treasuries had not. He emphasized the need for a liquid Treasury market and suggested that reducing the calibration of the eSLR measure could be beneficial.

Easing the eSLR could have several implications:

• Increased Bank Participation in Treasury Markets: By reducing capital constraints, banks may be more willing to hold and trade U.S. Treasury securities, potentially enhancing market liquidity.

• Economic Growth: Proponents argue that the reforms could support economic growth by enabling banks to provide more credit and engage more actively in financial markets.

• Financial Stability Concerns: Critics warn that reducing capital buffers could increase the risk of bank failures reminiscent of the 2008 financial crisis.

The Federal Reserve's proposal to ease the eSLR represents a significant shift in regulatory policy, reflecting ongoing debates about the balance between financial stability and economic growth. As the proposal moves forward, it will be essential to monitor its potential impacts on the banking sector, Treasury markets, and the broader economy.