Fed Weighs Easing Supplementary Leverage Ratio in Win for Big Banks

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The Federal Reserve has taken the first step in a controversial plan to ease the supplementary leverage ratio, reigniting debates over capital requirements for America’s biggest banks. The proposal, advanced by a 5-2 vote on Wednesday, marks a significant shift in regulatory policy that could reshape balance sheet constraints across the financial sector.

The supplementary leverage ratio, or SLR, requires banks to hold a set level of capital against total assets, regardless of risk profile. Originally implemented after the 2008 financial crisis as a safeguard, the rule treats traditionally safe assets like Treasuries the same as riskier holdings. Bank executives have long argued that this design creates unnecessary bottlenecks, especially when liquidity is needed in government bond markets.

Fed Chairman Jerome Powell defended the proposal, calling it “prudent” to recalibrate the rules. Speaking at a congressional hearing this week, Powell said the aim is to ensure banks are not discouraged from participating in low-risk activities like Treasury trading. The proposed changes mirror regulatory efforts from 2018 that failed to advance. This version would tie the enhanced supplementary leverage ratio, or eSLR, to a bank’s systemic risk profile rather than applying a flat requirement. Another option under discussion would broadly exempt Treasury holdings from leverage calculations altogether, though feedback will be sought before finalizing any exemptions.

Banks Applaud, Critics Warn of Systemic Risk

The financial sector welcomed the move, with bank lobbyists calling it a rational adjustment. Greg Baer of the Bank Policy Institute hailed the proposal as a “first step toward a more balanced capital framework,” while Financial Services Forum President Kevin Fromer said it would improve banks’ ability to support markets that impact consumers and businesses.

Treasury Secretary Scott Bessent, an advocate of lowering government borrowing costs, has also backed the rule change, arguing it could reduce 10-year Treasury yields by several basis points. Lower yields, in theory, would ease rates on mortgages, credit cards, and business loans.

Yet the move faces intense opposition. Former regulators like Sheila Bair, who led the FDIC during the last financial crisis, warned that reducing capital buffers could compromise financial stability. “You lower capital requirements, you build up leverage in the system, which by definition creates less resilience,” Bair said.

Two Fed governors, Adriana Kugler and Michael Barr, voted against the plan. Barr warned the rule would “unnecessarily and significantly” reduce safeguards, noting the change could slash capital requirements by $210 billion for subsidiaries of major banks.

Is Easing the Supplementary Leverage Ratio Necessary?

Proponents of the SLR revisions argue that the existing framework has morphed from a backstop into a binding constraint, especially during periods of market stress. By easing requirements on safe assets like Treasuries, banks could hold more government bonds, potentially increasing demand and stabilizing market functions.

However, recent data challenges the argument that SLR limits are currently restricting bank activity. Analysts from Morgan Stanley and Bank of America report that most large banks already meet or exceed leverage thresholds due to other capital rules. Evidence from the temporary 2020 exemption for Treasuries showed minimal impact on bank Treasury holdings.

President Donald Trump’s administration has championed the deregulatory push, with Vice Chair for Supervision Michelle Bowman leading the effort to unwind what she calls “distorted” post-crisis capital rules. Additional proposals to reduce systemic surcharges and adjust bank size thresholds are expected later this year.

Investors now face the question of whether easing the supplementary leverage ratio enhances market efficiency or exposes the system to greater risk. As debate continues, market participants will watch closely to see if the proposed changes advance beyond this initial stage.

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