US Banking Regulators Propose Enhanced Supplementary Leverage Ratio Reform
Last week, the US federal banking regulators proposed changes to the enhanced supplementary leverage ratio (“eSLR”) requirement for US global systemically important bank holding companies (“US GSIBs”) (the “Proposal”).1 The Proposal is intended to reduce the likelihood of the eSLR requirement being the binding capital constraint for US GSIBs and, thereby, enhance the ability of US GSIBs to hold low-risk assets. A key policy objective of the Proposal is to bolster the resiliency of the US Treasury market. The US federal banking regulators also requested comments on exempting certain US Treasury securities from the supplementary leverage ratio (“SLR”) requirement that applies to US GSIBs and Category II and III banking organizations.
The comment period for the Proposal is 60 days from publication in the Federal Register, which is expected shortly. In this Legal Update, we provide background on the eSLR requirement and describe the Proposal.
Background
As part of the international Basel III standards that were finalized in 2011, the Basel Committee on Banking Supervision (“Basel Committee”) introduced a minimum SLR requirement of 3%. This leverage capital requirement was designed to impose a floor on the amount of leverage that a large banking organization could employ. However, the Basel Committee intended it to serve as a backstop measure to risk-based capital requirements, which were to be in most cases the binding constraint on leverage. The Basel Committee’s SLR requirement was defined as the ratio of a banking organization’s tier 1 capital to a combination of on- and off-balance sheet exposures, which is the same definition adopted by US banking regulators when they incorporated the SLR into their 2013 regulatory capital requirements.2
Currently, the SLR requirement applies to banking organizations that are designated as Category I, II, or III banking organizations under the tailoring framework put in place in 2019 or otherwise are subject to the advanced approaches provisions of the risk-based capital requirements. Under the SLR requirement, banking organizations must maintain a SLR of at least 3% at each of the holding company level and the insured depository institution level.3
For banking organizations that are identified as US GSIBs, they must also satisfy at the holding company level an eSLR requirement comprised of a 2% buffer on top of the 3% SLR requirement (for a combined 5% eSLR requirement).4 Further, insured depository institutions that are owned by US GSIBs must satisfy a separate eSLR requirement comprised of a 3% buffer on top of the 3% SLR requirement (for a combined 6% eSLR requirement) to be well capitalized under the prompt corrective action framework.5
Since its adoption, the eSLR requirement has become the binding capital requirement for many US GSIBs, undermining the effectiveness of risk-based capital requirements by creating incentives for US GSIBs to shift from lower-risk assets to higher-risk assets. By increasing the costs of holding US Treasury securities, the eSLR requirement also has been viewed as impeding the efficient operation of the US Treasury market. During the COVID pandemic, the federal banking regulators had to address a sharp reduction in the liquidity of the US Treasury market by temporarily excluding US Treasury securities and deposits at the Federal Reserve from the denominator of the SLR requirement.6 Due to these problems, there has been a growing consensus that the eSLR requirement should be recalibrated.
The Proposal
The Proposal would change the eSLR requirement that applies to US GSIBs and their depository institution subsidiaries. It would not change the baseline 3% SLR requirement that applies to banking organizations that are designated as Category I, II, or III banking organizations or otherwise are subject to the advanced approaches provisions of the risk-based capital requirements. Nor would it change the leverage capital requirement that applies to most US banking organizations or the community bank leverage ratio requirement that applies to certain, smaller US banking organizations.7 It also would not change the exclusion on certain central bank deposits from the SLR requirement for qualifying custody banks.8
For the 8 US GSIBs, the Proposal would recalibrate the eSLR requirement to equal 50% of the organization’s method 1 surcharge calculated under the Federal Reserve’s risk-based GSIB surcharge framework, rather than the current requirement of 2%.9
The Proposal would also modify the eSLR requirement for depository institution subsidiaries of US GSIBs from the current 3% threshold to a requirement that is 50% of the parent US GSIB’s method 1 surcharge calculation (which would be added to the 3% SLR requirement). Further, the Proposal would remove the eSLR requirement for a depository institution subsidiary of a US GSIB to be considered “well capitalized” under the prompt corrective action framework, and instead, impose the eSLR requirement as a capital requirement (i.e., the institution must satisfy the requirement to avoid restrictions on capital distributions and certain discretionary bonus payments).
| Institution Category | Current eSLR Requirement | Proposed eSLR Requirement |
|---|---|---|
| US GSIBs | 5% | 3% + 50% GSIB method 1 surcharge |
| Insured depository institutions that are owned by US GSIBs | 6% | 3% + 50% parent’s GSIB method 1 surcharge |
| Category II and III banking organizations and advanced approaches banking organizations that are not US GSIBs | 3% (SLR) | 3% (unchanged) |
The banking regulators estimate that the Proposal would result in a less-than 2% aggregate reduction in tier 1 capital requirements for US GSIBs and about a 27% aggregate reduction in the tier 1 capital requirements for US GSIBs’ depository institution subsidiaries.
The Proposal also would make conforming modifications to the leverage-based components of the Federal Reserve’s total loss-absorbing capacity (“TLAC”) and long-term debt (“LTD”) requirements for US GSIBs. The Federal Reserve requires US GSIBs to satisfy certain leverage-based ratios of TLAC to avoid limitations on the firm’s capital distributions and certain discretionary bonus payments. To avoid the limitations, a US GSIB must maintain a minimum TLAC to total leverage ratio that is equal to 2% on top of the 7.5% minimum leverage component of a GSIB’s external TLAC requirement (for a total of 9.5%). The Proposal would replace the 2% TLAC leverage ratio with a new TLAC leverage ratio equal to the organization’s eSLR requirement.
The Federal Reserve also requires US GSIBs to maintain a minimum amount of leverage-based external LTD that is equal to a US GSIB’s total leverage exposure multiplied by 4.5%. The Proposal would revise the minimum leverage-based external LTD requirement to reflect the proposed changes to the eSLR requirement. Therefore, the proposed minimum leverage-based external LTD requirement would be total leverage exposure multiplied by the sum of 2.5% (i.e., the minimum SLR of 3% minus 0.5% to allow for balance sheet depletion) and the organization’s eSLR requirement.
| Current Requirement | Proposed Requirement | |
|---|---|---|
| Minimum TLAC Ratio | 9.5% | 7.5% + 50% GSIB method 1 surcharge |
| Minimum LTD Ratio | 4.5% | 2.5% + 50% GSIB method 1 surcharge |
The banking regulators estimate that the aggregate TLAC requirements that apply to US GSIBs would decline by 5% and the aggregate LTD requirements would decline by approximately 16%.
In addition to the proposed regulatory changes, the Proposal invites comment on a potential additional modification that would exclude from the dominator of the SLR held-for-trading Treasury securities of broker-dealer subsidiaries of US GSIBs and Category II and III banking organizations. Given the disruptions in the Treasury market during the COVID pandemic, the banking regulators want to consider whether any “safety valves” are needed to enhance the resilience of the banking system and financial markets during market downturns.
Implications
According to the OCC, the Proposal would result in the eSLR ranging from 3.5% to 4.25% depending on a US GSIB’s risk profile. This would be lower than the current 5% standard at the holding company level and 6% standard at the depository institution level. This change would reduce the eSLR requirement below the level of the risk-based tier 1 capital requirement for all GSIBs and most of their depository institution subsidiaries, thereby generally eliminating the distortions caused by the eSLR requirement being the binding constraint.
For US GSIBs, the practical outcome of the Proposal is likely to be greater balance sheet flexibility, particularly at the depository institution level. However, the Proposal is not expected to allow US GSIBs to materially increase capital distributions as the amount of capital relief at the holding company level is expected to be modest.
For all banking organizations subject to the SLR requirement, the Proposal’s request for comment on exempting certain Treasury securities opens the door for additional reforms to enhance balance sheet flexibility as well as to help strengthen the US Treasury market at a time when the US federal government is issuing record amounts of new Treasuries to finance unprecedented budget deficits.
Finally, the Proposal is the first major reform of capital requirements since the start of the second Trump Administration, which has made bank regulatory reform a policy priority. Treasury Secretary Scott Bessent has vowed to free banks from their regulatory straitjacket and help enhance the performance of the banking industry. Federal Reserve Chair Jay Powell and Vice Chair for Supervision Miki Bowman have indicated that the banking agencies plan to move forward with a new Basel III endgame proposal this Fall. In light of these comments, it appears that the Proposal is just the start of long-awaited prudential regulatory reform for the US banking industry.
1 The US federal banking regulators consist of the Board of Governors of the Federal Reserve System (“Federal Reserve”), the Office of the Comptroller of the Currency (“OCC”), and the Federal Deposit Insurance Corporation (“FDIC”). The Federal Reserve, Board Meeting (June 25, 2025); The OCC, Statement by the Acting Comptroller(June 25, 2025); The FDIC, Board Meeting(June 27, 2025). The Proposal was issued by the Federal Reserve by a vote of 5-2 and by the FDIC by unanimous vote of its directors.
2 More recently, a community bank leverage ratio requirement was made available to small US banking organizations as an option for forgoing compliance with the risk-based capital requirements. 12 C.F.R. §§ 3.12, 217.12, 324.12.
3 12 C.F.R. §§ 3.10(a)(1), 217.10(a)(1), 324.10(a)(1).
4 12 C.F.R. § 217.11(c). A GSIB that fails to comply with this requirement is subject to restrictions on capital distributions and certain discretionary bonus payments.
5 12 C.F.R. §§ 6.4(b), 208.43(b), 324.403(b). The OCC’s current eSLR requirement applies to national banks and federal savings associations with more than $700 billion in total consolidated assets or more than $10 trillion total in assets under custody, or that are subsidiaries of holding companies that meet those thresholds, regardless of GSIB status. 12 C.F.R. 6.4(b)(1). The Proposal would align the OCC’s scope to be the same as the Federal Reserve’s and FDIC’s. The preamble indicates that this change would not impact the number of OCC-regulated organizations that are subject to the eSLR requirement.
6 85 Fed. Reg. 20,578 (Apr. 14, 2020) (codified at 12 C.F.R. § 217.303).
7 The preamble to the Proposal indicates that changing the leverage capital requirement that applies to all US banking organizations may be inconsistent with the Collins Amendment. See 12 U.S.C. § 5371.
8 Economic Growth, Regulatory Reform and Consumer Protection Act, Pub. L. 115-174 § 401, 132 Stat. 1296, 1356-59 (2018).
9 Under the Federal Reserve’s regulatory capital rules, a firm identified as a GSIB must calculate its GSIB surcharge under two methods and be subject to the higher surcharge. The first method (method 1) is based on five categories that are correlated with systemic importance—size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity. The second method (method 2) uses similar inputs but replaces substitutability with the use of short-term wholesale funding and is calibrated in a manner that generally will result in surcharge levels for GSIBs that are higher than those calculated under method 1.
