Board of Governors of the Federal Reserve System

Largely for the reasons expressed in my statement regarding the proposed rule, I cannot support today's final rule to weaken the enhanced supplementary leverage ratio (eSLR).¹ I support the important objective of enhancing the resilience of the U.S. Treasury market. However, the final rule unnecessarily and significantly reduces bank-level capital requirements by $219 billion for global systemically important banking organizations (GSIBs) and weakens the eSLR as a backstop. I am skeptical that it will achieve the stated objective of improving the resiliency of the Treasury market. As I stated at the time of the proposal, I could have supported a much more modest adjustment to the eSLR were it to be accompanied by prompt, full, and effective implementation of the Basel III endgame reforms to risk-based capital.

The concerns I expressed in June about the proposed rule persist in this version, and have been exacerbated by the addition of a one-percent cap on the eSLR buffer for bank subsidiaries of GSIBs. The one-percent cap, for which the public did not have an opportunity to provide feedback, is not justified and further weakens the eSLR as a capital backstop.

The final rule significantly reduces bank capital
The final rule would reduce tier 1 capital requirements by 28 percent at GSIBs' depository institution subsidiaries, resulting in a $219 billion decline in bank capital. At the holding company, the decline is 1.4 percent ($13 billion). The bank-level declines in capital are much deeper than what the agencies have previously considered, including in the 2018 eSLR proposal. The rule would also reduce total loss absorbing capacity requirements by 5 percent ($90 billion), and long-term debt requirements by 16 percent ($132 billion). Taken together, these changes would significantly increase the risk that a GSIB bank would fail, orderly resolution would not be possible, and the deposit insurance fund would incur higher losses.

The decline in capital at the holding company level would be much worse if not for risk-based requirements. Those requirements could go down as well, either as a result of policy changes or due to actions that banks can take to reduce their risk-based requirements. Looking solely at the leverage ratio without considering the limiting effect of risk-based capital requirements, the aggregate reduction in the eSLR requirement at the holding company level would be about $209 billion for GSIBs and $289 billion for their depository institution subsidiaries. Significantly lowering the eSLR in this manner increases the incentives firms have to game their risk-based requirements by lowering their risk-weighted asset density—a pattern that GSIBs have consistently followed recently. This kind of gaming of risk-based requirements is precisely what leverage ratios are designed to block.

The final rule downplays the concern about the decline in bank-level capital by pointing to the expectation that holding companies serve as a source of strength to their banks. In practice, however, there are lots of examples of firms failing without supporting their bank subsidiary, as happened with Silicon Valley Bank in 2023. Moreover, the federal bank regulatory agencies have not yet adopted rules implementing the source of strength doctrine, as required by the Dodd-Frank Act. Reducing bank-level capital could also have adverse consequences in the event of material financial distress of a GSIB, as it would make it more difficult for the bank to continue operations under a single point of entry strategy for orderly resolution.

The final rule is unlikely to significantly enhance Treasury market intermediation, especially in times of stress
As I discussed in my statement regarding the proposed rule, Treasury market intermediation primarily happens at the broker-dealer, but the overwhelming bulk of the capital depletion under the final rule happens in the bank. While firms could, in theory, use the additional headroom provided under the rule to increase their participation in Treasury market intermediation, it is not clear that result would occur. Firms could just as easily shift to other activities with low risk-based capital requirements and significantly higher returns than Treasury market intermediation. Moreover, much of the capital that is freed up at the holding company level, where not otherwise constrained, is likely to be diverted to returning equity to shareholders, rather than intermediation.

The final rule is particularly unlikely to help in times of stress. If banks use up their excess capital in normal times, there will not be excess capital in stressful times. Moreover, firms' internal stress models measuring value at risk will likely limit Treasury intermediation when volatility increases, as they have in the past.

In short, firms will likely use the rule to distribute capital to shareholders and engage in the highest return activities available to them, rather than to meaningfully increase Treasury intermediation.

The final rule erodes the transparency of the capital backstop
In addition, the final rule takes a relatively straightforward leverage ratio and lowers it by using a risk-based GSIB surcharge metric, making it more difficult for the market to understand and rely on in times of stress. The way the final rule integrates the GSIB surcharge calculation is also at odds with the GSIB surcharge framework we use in the U.S., where the method 2 GSIB surcharge is generally the binding calculation. This rule relies instead on the less stringent method 1 calculation for no other reason than that it allows for a larger reduction in capital.

The rule further erodes constraints on the expansion of the largest banking organizations
Finally, as multiple comments on the proposal pointed out, this rule is a further relaxation of capital requirements that shifts the competitive landscape in banking away from community and regional banks in favor of GSIBs. Lower capital requirements further reduce the constraints on GSIB expansion, which is likely to increase the concentration of the banking system to the detriment of banking customers and to financial stability.

Conclusion
The rule weakens the resilience of the largest banks, depleting their loss-absorbing cushions of capital, without a clear offsetting benefit. I dissent.

1. https://www.federalreserve.gov/newsevents/pressreleases/barr-statement-20250625.htm Return to text