Federal Reserve Proposes Overhaul of Bank Leverage Requirements

On June 25, 2025, the Federal Reserve proposed significant reforms to the enhanced supplementary leverage ratio (eSLR) for large U.S. banks, aiming to align capital requirements more closely with each bank's role in the global financial system. This proposal, approved by a 5-2 vote, seeks to replace the existing flat percentage rule with a framework that adjusts capital buffers based on systemic importance. (reuters.com)

The eSLR currently mandates that large banks hold a fixed percentage of capital against their total assets, including low-risk holdings like U.S. Treasuries. Under the proposed changes, the 2% eSLR buffer for U.S. global systemically important banks (GSIBs) would be replaced with a buffer equal to half of the GSIB’s Method 1 surcharge. Similarly, for GSIB bank subsidiaries, the 3% eSLR buffer would be adjusted to half of the GSIB’s Method 1 surcharge. These adjustments are expected to reduce capital requirements at depository subsidiaries by approximately 27%, or $213 billion, while holding companies would still face overall constraints. (reuters.com)

Federal Reserve Chairman Jerome Powell supported the initiative, stating that the significant increase in low-risk assets on bank balance sheets over the past decade has made the leverage ratio more binding, necessitating a reconsideration of the original approach. (reuters.com)

Despite the majority approval, the proposal faced opposition from Federal Reserve Governors Adriana Kugler and Michael Barr. Governor Barr expressed skepticism about the proposal's effectiveness in improving Treasury market resilience during times of stress and raised concerns that it might weaken the capital positions of the largest banking organizations. (reuters.com)

The banking industry has largely welcomed the proposed changes, viewing them as a means to reduce funding costs and enhance their capacity to support the economy without compromising safety and soundness. Analysts from institutions like Morgan Stanley estimate that the plan could free up $185 billion among the banks they cover, while Goldman Sachs projects a potential $5.5 trillion in balance sheet relief. (reuters.com)

The easing of capital requirements is expected to stimulate merger activity among U.S. banks. A more favorable regulatory environment, coupled with heightened competition and the growing need for technological investments, is anticipated to drive an increase in bank mergers over the coming year. Regulators, including the Federal Reserve, are signaling a more supportive stance, as evidenced by the approval of Capital One’s $35.5 billion acquisition of Discover Financial Services. (apnews.com)

On April 18, 2025, the Federal Reserve approved Capital One Financial Corporation's application to merge with Discover Financial Services. This approval followed a comprehensive review of the financial and managerial resources of both companies, the convenience and needs of the communities to be served, and the competitive and financial stability impacts of the proposal. (investor.capitalone.com)

As a condition of the merger, Capital One committed to complying with a Federal Reserve order directed at Discover, addressing past interchange fee overcharges between 2007 and 2023 that resulted in a $100 million fine and customer reimbursements. (apnews.com)

The proposed regulatory changes and the approval of significant mergers like that of Capital One and Discover are poised to reshape the U.S. banking landscape. While these developments may lead to increased efficiency and competitiveness among banks, they also raise concerns about reduced capital buffers and potential risks to financial stability. The balance between fostering economic growth and ensuring the resilience of the financial system remains a critical consideration for regulators and industry stakeholders.