U.S. Treasuries in focus as Fed, FDIC float eSLR changes

U.S. regulators propose easing eSLR, cutting GSIB capital requirements

U.S. banking regulators have proposed easing the enhanced Supplementary Leverage Ratio (eSLR), a post-crisis backstop that currently binds large bank balance sheets regardless of asset risk. The change targets U.S. global systemically important banks (GSIBs), recalibrating constraints that have limited balance-sheet capacity for low-risk activities.

The mechanics center on making the leverage ratio a true backstop rather than a front-line constraint in normal times. By adjusting exposure measures, the proposal seeks closer alignment with risk-based capital and stress testing while maintaining core safety standards.

as reported by CNBC, the federal reserve voted 5–2 to seek public comment, with Chair Jerome Powell and Vice Chair for Supervision Michelle Bowman supporting, and Governors Michael Barr and Adriana Kugler dissenting. The move is framed as easing big bank capital rules to better reflect today’s market structure.

Why easing eSLR matters for Treasury market liquidity

When eSLR binds, it can discourage banks from intermediating in U.S. Treasurys and repo, even though these activities are low risk. Proponents argue recalibration could expand dealer capacity, reduce balance-sheet frictions, and improve market-making resilience during stress.

Critics counter that relaxing a binding backstop can undercut resilience if risk migrates elsewhere or if benefits fail to materialize in turmoil. “Unnecessarily and significantly” reducing big-bank capital would raise systemic concerns, said Michael Barr, a Governor at the Federal Reserve.

According to Investing.com, the proposal implies about $210 billion in capital relief at GSIB bank subsidiaries, where eSLR has been most binding. That shift could free balance-sheet room for Treasury intermediation and custody-related services, subject to firm risk limits and supervisory oversight.

According to the FDIC, the estimated reduction at the holding-company level is roughly $13 billion, about 1.4% of tier 1 capital. Any secondary effects on total loss-absorbing capacity or distributions would depend on future supervisory feedback and how firms reallocate capital across activities.

Supporters vs. critics: positions of Barr, Kugler, Powell, Bowman

Supporters: Powell, Bowman, FDIC’s Hill, OCC’s Hood; liquidity focus

Supporters say the ratio has become overly binding, constraining low-risk assets like Treasurys. Powell and Bowman emphasize recalibration as prudent and consistent with current market structure. FDIC’s Travis Hill and the OCC’s Rodney Hood highlight potential gains for lending and Treasury market functioning.

Critics: Barr and Kugler; capital reduction and systemic risk

Barr argues the change would materially cut capital at the largest firms, elevating loss-absorbing risks without clear proof of liquidity gains in stress. Kugler warns the benefits are uncertain and stresses coordination with risk-based reforms. Both emphasize safeguarding systemic resilience during market shocks.

FAQ about enhanced Supplementary Leverage Ratio (eSLR)

How much capital relief would big banks receive and which GSIB subsidiaries are most affected?

About $210 billion at GSIB bank subsidiaries and roughly $13 billion at holding companies. The most affected entities are eSLR-constrained GSIB subsidiaries.

Will easing the eSLR improve Treasury market liquidity or raise systemic risk during stress?

Supporters expect better Treasury intermediation; critics warn of higher systemic risk and uncertain benefits under stress. Outcomes depend on implementation, supervision, and market conditions.