Board of Governors of the Federal Reserve System

Simple and transparent regulatory requirements, like those based on leverage ratios, can serve an important role in the regulatory capital regime, but they must be calibrated appropriately. As currently calibrated the enhanced supplementary leverage ratio (or eSLR as it's known) is regularly the binding requirement for some banks, not a backstop as intended. This can have unintended consequences for bank health. And it can also impede market functioning, particularly during times of stress.

Regularly binding leverage ratio requirements, which treat all assets the same no matter their risk, can make it unattractive for banks to hold lower-risk assets. For example, the leverage ratio treats a Treasury bond the same as a junk bond, but we know they're not the same. When the leverage ratio binds, that can push bank management toward riskier business models as they get no credit in the regulatory capital requirements from operating a lower-risk business.

This in turn can have implications for the broader functioning of markets for safe assets, particularly during times of stress. That is because the leverage-based regulatory requirements can constrain the capacity of large banks to intermediate in markets like the Treasury market. Recent research has suggested that a recalibration of the requirements could allow banks to absorb more Treasuries in a crisis.¹

So, re-working that incentive structure to address these unintended consequences of the current calibration make sense. I believe the proposed approach to simply reduce the degree to which the eSLR binds is preferable to explicitly excluding particular assets, like government liabilities. It is not our job to pick winners and losers. The proposed approach will leave those choices and the risk management to the banks, which is appropriate.

For these reasons, I support the proposal to recalibrate the eSLR so that it serves as a backstop to the risk-based requirements. I look forward to reviewing comments.

1. See, for example, Duffie, Darrell. "How US Treasuries Can Remain the World's Safe Haven." Journal of Economic Perspectives 39, no. 2 (2025): 195-214. Return to text