Board of Governors of the Federal Reserve System

I appreciate the work that has gone into enhanced supplementary leverage ratio (eSLR) final rule. It was my hope to be able to support a recalibration of the eSLR standard that would retain appropriate stringency, while also avoiding undue disincentives for important low-risk activities, like Treasury intermediation.

Unfortunately, I cannot support the eSLR rule in front of the Board today, given its economically significant reduction in the amount of capital that is required to be maintained at the Federal Deposit Insurance Corporation-insured bank subsidiaries of global systemically important banking (GSIB) organizations. Specifically, staff projects that the final rule would result in an estimated reduction in aggregate tier 1 capital requirements for GSIB bank subsidiaries of 28 percent.

I am sympathetic to the rule's recalibration of the eSLR at the holding-company level. However, as I noted during the open board meeting on the proposal, we should carefully consider the implications of capital flowing out of GSIB bank subsidiaries, even if it stays within the organization. While the bank regulatory agencies have put in place a variety of resolution-planning and other mechanisms to facilitate the recovery or resolution of a GSIB that suffers distress, bank-level capital remains fundamental to maintaining bank-level solvency and protecting the depository insurance fund. The final rule preamble suggests the potential risks of such a significant reduction in bank-level capital are mitigated by holding company capital requirements, which should result in capital released from the bank remaining "trapped" within the consolidated organization. Even if this proves to be true, it is far from clear to me that we should assume financial resources positioned at a different GSIB subsidiary, such as a foreign affiliate, could be seamlessly reallocated to the bank subsidiary during periods of stress, if losses are occurring simultaneously across the organization. Therefore, I am concerned that today's actions represent a material change to bank-level capital requirements that are a core safeguard against vulnerabilities at the largest and most complex banking institutions.

Moreover, given the proposed and anticipated changes to GSIB risk-based capital requirements, including potential modifications to the GSIB surcharge methodology, which would impact the effects of this final rule, I believe more analysis is needed on the cumulative effects of these changes before we can conclude the potential benefits of today's final rule outweigh its estimated costs. A series of well-intended, individually reasonable actions can nevertheless result in disproportionately large reductions in overall capital that can reduce the resilience of the system.

Notwithstanding these objections, I look forward to working with my colleagues on future changes to risk-based capital requirements and maintaining a regulatory framework that efficiently and effectively achieves a banking system that is safe, sound, and able to provide products and services to households and businesses.