Federal Reserve Proposes Major Overhaul of Bank Leverage Requirements

On June 25, 2025, the Federal Reserve proposed significant reforms to the enhanced supplementary leverage ratio (SLR) for large global banks, aiming to bolster their participation in the U.S. Treasury markets. The proposal, approved by a 5-2 vote, seeks to link capital requirements more directly to a bank’s role in the global financial system, replacing the existing flat percentage rule.

The SLR, established in 2014 as part of the Basel III reforms, mandates that banks hold capital against all assets, including low-risk ones like U.S. Treasury securities. This measure was intended to ensure that banks maintain adequate capital buffers to absorb losses during financial downturns. However, critics argue that the SLR's non-risk-sensitive nature discourages banks from holding low-risk assets and limits their ability to act as intermediaries in the Treasury market during periods of stress.

The proposed changes aim to alleviate constraints that currently discourage banks from participating in the $29 trillion Treasury market, especially during times of financial stress. The adjustments would align U.S. requirements more closely with those in Europe and Asia.

Federal Reserve Chairman Jerome Powell supported the initiative, viewing it as a prudent update reflecting increased holdings of low-risk assets. He noted that the growing volume of Treasuries necessitates adjustments to leverage requirements to ensure market stability.

However, the proposal faced opposition from Fed Governors Adriana Kugler and Michael Barr, who cited concerns over reduced capital buffers and potential systemic risks. Governor Barr emphasized the importance of maintaining strong capital requirements to ensure financial stability.

The banking industry has generally welcomed the proposed easing of the SLR, viewing it as a means to enhance market liquidity and reduce unnecessary constraints on low-risk assets. However, some analysts and policymakers have expressed caution, warning that lowering capital requirements could make the financial system more vulnerable during economic downturns.

This proposal marks the most significant change to capital requirements since the 2008 financial crisis. During the COVID-19 pandemic, the Federal Reserve temporarily allowed banks to exclude Treasuries and central bank reserves from SLR calculations to facilitate market functioning. The current proposal seeks to make more permanent adjustments to the SLR framework, aligning U.S. requirements more closely with those in Europe and Asia.

By easing SLR constraints, banks may be more willing to hold and trade U.S. Treasuries, potentially enhancing liquidity in the Treasury market, especially during periods of stress. Reducing capital requirements could free up capital for banks, allowing for increased lending and investment activities. However, it may also reduce the buffers that protect against potential losses, raising concerns about financial stability. Aligning U.S. leverage requirements with international standards could create a more level playing field for global banks but may also lead to debates about the adequacy of capital buffers in different regulatory environments.

The Federal Reserve's proposal to ease the enhanced supplementary leverage ratio for large banks represents a significant shift in regulatory policy, aiming to balance the need for market liquidity with the imperative of financial stability. As the proposal moves forward, it will be essential to monitor its impact on the banking sector and the broader financial system.