New eSLR change aims to boost Treasury market but raises stability concerns
U.S. regulators on Wednesday proposed one of the most significant easing measures to bank capital requirements since the 2008 financial crisis, a move that would benefit major banks and align with the Trump administration’s deregulatory agenda.
The proposal targets the enhanced supplementary leverage ratio (eSLR), a rule that requires large U.S. banks to hold minimum capital based solely on their size. The rule currently sets the eSLR at 5% for the largest financial institutions, including JPMorgan Chase, Bank of America, Goldman Sachs, and Morgan Stanley.
If adopted, the plan would lower that capital threshold by 1.4 percentage points for bank holding companies — about $13 billion — and cut the requirement for their bank subsidiaries by a full 10 percentage points. The goal is to allow banks to lend more freely and support liquidity in the $30 trillion U.S. Treasury market.
Supporters Call It a “Necessary Adjustment”
The Federal Reserve approved the proposal by a 5-2 vote, opening the measure to public comment. The FDIC and OCC also participated in developing the rule change. Fed Vice Chair for Supervision Michelle Bowman described the measure as a “critical first step” to strengthen Treasury market resilience while balancing systemic safety.
“This proposal takes a first step toward what I view as long overdue follow-up to review and reform what have become distorted capital requirements,” Bowman said in a separate speech Monday.
Advocates say the move could alleviate constraints that have hampered banks’ ability to act as market-makers for Treasurys, especially during periods of market stress like the onset of the COVID-19 pandemic.
Opposition Warns of Increased Risk
Not all regulators agreed. Fed Governors Michael Barr and Adriana Kugler opposed the proposal, warning that the lower capital requirements could increase systemic risk. Kugler said the move “will increase systemic risk in a manner that is not justified,” while Barr warned that banks would likely use the freed-up capital for shareholder payouts rather than boosting market liquidity.
Barr estimated the reduction would cut system-wide subsidiary capital by $210 billion. Sen. Elizabeth Warren echoed the concerns, calling the plan a return to the deregulatory mindset that helped fuel the 2008 crash. “Deregulating those banks is planting the seeds for another financial catastrophe,” she said.
More Changes Coming
The Fed hinted this may only be the beginning. Other adjustments under consideration include changes to the global systemically important bank surcharge and updates to capital thresholds based on asset size. A July 22 Fed conference will further discuss the capital framework for U.S. banks.
Bowman also confirmed the Fed will no longer consider “reputation risk” during bank examinations, another sign of loosening regulatory standards.