Regulators Reportedly Considering Easing Some Capital Standards for Large Banks

Action: Fed Chair Jerome Powell and Treasury Secretary Scott Bessent have commented in recent months that banking regulators are considering easing the supplemental leverage ratio (SLR), which sets additional capital requirements for banks based on the ratio of a bank’s capital relative to its total leverage. Generally, banks with more than $250 billion in total assets are required to hold at least 3% additional capital (as a percentage of total consolidated assets) with designated global systemically important banks (GSIBs) subject to an additional 2% “enhanced” SLR (totaling 5% of additional capital).

Key Insights

• The SLR, established in 2014 as part of the Basel III reforms, has been a controversial component of the framework governing bank capital requirements. Some stakeholders believe the SLR is an important backstop to risk-based capital requirements that helps limit excessive leverage and enhance banking system resilience.
• However, because leverage ratios are risk insensitive – that is, leverage exposure of itself does not consider how risky an asset is – others argue they disincentivize holding low-risk assets (e.g., Treasury securities).
• It is unclear what steps regulators may take to ease the SLR requirements. One option would be to exempt Treasury securities and central bank deposits from the calculation of a bank’s leverage, a step regulators took temporarily during the pandemic to ease stress in the Treasury market and one that Chair Powell has stated could improve Treasury market liquidity longer term.
• Another approach, possibly more likely, is to maintain the current SLR calculation for most banks but to adjust the additional capital requirement for GSIBs based on each firm’s risk profile, a proposal originally considered under the first Trump Administration in 2018.
• The Trump Administration has made easing regulatory burdens a key priority, and the Fed has recently indicated a willingness to reconsider some requirements including capital standards and stress tests. 
• As part of the Basel III Endgame reforms in 2023, regulators had considered lowering the bank size threshold at which the SLR applies (to $100 billion in total assets) and making other adjustments to its calculation that would have required banks to hold more capital. However, these proposals were dropped following opposition from the banking sector and some policymakers.
• Another important question concerns the process by which any changes to regulations would be adopted. This would be the Federal Reserve’s first major banking regulation since the February Executive Order which requires the independent regulatory agencies to submit proposed regulations to the Office of Management and Budget for preclearance, on the ground that those agencies are not in fact independent but rather part of the Executive Branch. Section 2(b) of that Order stated specifically that it applies to the Federal Reserve  “only in connection with its conduct and authorities directly related to its supervision and regulation of financial institutions.”
• On May 22, in Trump v. Wilcox, the Supreme Court in an unsigned order noted, citing to a 2020 case, that “[t]he “Federal Reserve is a uniquely structured, quasi-private entity that follows in the distinct historical tradition of the First and Second Banks of the United States.” While Wilcox concerns the question of potential removals of officials without cause, the Court’s statement could also mean that the Federal Reserve is not covered by the provisions of the Executive Order.