Summary
On June 27, 2025, the Federal Reserve approved a proposal to recalibrate a key capital requirement applicable to the largest U.S. banking organizations (known as global systemically important banks (GSIBs)).
- The proposal would revise the enhanced supplementary leverage ratio, aiming to reduce disincentives for GSIBs to participate in lower-risk, lower-return activities, such as U.S. Treasury market intermediation.
- Comments on the proposal, which was issued together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation,1 are due on August 26, 2025.
Background
Minimum capital requirements are one of the primary tools for prudential regulation. These requirements vary in terms of what they comprise, how they are calculated and to which institutions they apply.
Banks and their holding companies are generally required to hold capital against their assets, which primarily consist of loans but may also include other assets such as U.S. Treasury securities. To account for varying risk levels, regulators impose risk-based capital requirements using a risk-weighted assets (RWA) approach. Under this approach, different weights are assigned to assets and off-balance sheet exposures based on their risk, requiring banks and their holding companies to hold more capital against riskier assets.
While risk-based requirements are an important tool to ensure banking organizations are adequately capitalized, the calculations are complex and include a degree of subjectivity, making them vulnerable to manipulation, as minimizing RWAs may increase profits. As a result, risk-based capital requirements alone are not sufficient and may inadvertently encourage excessive risk-taking.
To address these gaps and potential negative incentives, regulators also impose leverage capital requirements. The leverage ratio was introduced by the Basel Committee on Banking Supervision as part of the Basel III framework following the 2007-2009 financial crisis, and is intended to serve as a backstop to risk-based requirements.2 Unlike risk-based capital requirements, leverage ratios treat all assets and exposures equally and set minimum capital levels based on an organization’s total assets and exposures, regardless of their individual risks. For example, while a high-risk loan may be treated as riskier and require more capital than a U.S. Treasury security under the risk-based requirement, risk is not part of the calculation under the leverage requirements.
In 2014, as part of the implementation of Basel III, U.S. banking regulators introduced the Supplemental Leverage Ratio (SLR), which measures a bank’s Tier 1 capital against its total leverage exposure, including certain off-balance sheet exposures. This addressed concerns that off-balance sheet items had previously masked a bank’s true leverage because they are not included in the Tier 1 capital calculations. Furthermore, institutions identified as GSIBs became subject to an enhanced SLR (eSLR), which imposes an additional leverage buffer, on top of the SLR.3How Does the Current US Leverage Ratio Framework Work?
Under the current framework, all banking organizations subject to U.S. capital rules are required to have a minimum Tier 1 leverage ratio of 4%.4 This ratio is calculated by dividing the organization’s Tier 1 capital by its average total consolidated assets. Certain larger banking organizations are required to hold a minimum SLR of 3%.5 The SLR is calculated by dividing the organization’s Tier 1 capital by its total leverage exposure, which includes certain off-balance sheet items.6 Finally, U.S. GSIBs are subject to the eSLR, so in addition to maintaining the SLR of 3%, they must maintain an additional leverage buffer of 2% or be subject to limitations on capital distributions and certain discretionary bonus payments.7 This effectively requires U.S. GSIBs to have an SLR of at least 5%.8
Over the years, Federal Reserve discussions and regulatory actions have addressed these leverage requirements. Notably, in 2020, in response to the COVID pandemic, the agencies temporarily excluded from the SLR calculation holdings of U.S. Treasury securities and reserves (i.e., deposits at Federal Reserve Banks), which expired on March 31, 2021.9
What Would Change?
As highlighted by the chair of the Federal Reserve, Jerome Powell, and the vice chair for supervision, Michelle Bowman,10 the current proposal reflects the Federal Reserve’s perception that the context for leverage requirements has evolved significantly since 2014. First, over the past decade, banks’ balance sheets have seen a substantial increase in safer and lower-risk assets. Second, what was originally intended as a backstop to risk-based capital requirements has, in practice, become a binding constraint for many institutions. Specifically, the agencies argue that the current leverage framework discourages banks from participating in lower-risk, lower-return activities, such as U.S. Treasury market intermediation, while incentivizing higher-risk, higher-return activities without a commensurate increase in capital requirements. This unintended consequence has the potential to impact the orderly functioning of the U.S. Treasury market and the U.S. financial markets generally.11
In response, the proposal aims to recalibrate the eSLR standards so that the leverage ratio once again serves as a backstop, rather than a binding constraint. The expectation is that this adjustment will encourage banking organizations to engage more readily in low-risk, low-return activities, which will in turn support the smooth functioning of the U.S. Treasury market.
Below are key aspects of the proposal.
eSLR Recalibration
For GSIBs, the proposal would replace the current flat 2% eSLR buffer with a buffer equal to 50% of the GSIB’s Method 1 surcharge.12 Based on the most updated information disclosed by the Financial Stability Board, GSIBs’ Method 1 surcharges ranged from 1-2.5% in 2024,13 meaning that the total eSLR would range from 3.5-4.25%.14
In practice, this recalibration is projected to reduce required Tier 1 capital at the holding-company level by approximately 1.4% (or $13 billion) for most GSIBs, and at the depository institution subsidiary level by an average of 27% (or $213 billion) for the major depository institution subsidiaries of GSIBs.15
Despite these reductions, the proposal notes that most of the capital would remain within the consolidated holding company due to ongoing holding-company capital requirements. As a result, the capital would not be available for distribution to shareholders but would provide holding companies with greater flexibility to allocate capital among subsidiaries, including those involved in U.S. Treasury market intermediation.16
Unlike the temporary relief measures adopted in 2020, the proposal does not exclude U.S. Treasury securities or reserves from the SLR denominator. These assets would continue to be included, consistent with the Basel III framework. Nonetheless, in order to further address concerns about U.S. Treasury market intermediation, the proposal invites comments on potential exclusion of the held-for-trading Treasury securities of certain GSIBs’ broker-dealer subsidiaries from the SLR denominator.17
TLAC and LTD Requirements
GSIBs are also subject to Total Loss-Absorbing Capacity (TLAC) and Long-Term Debt (LTD) requirements. These are intended to provide a buffer to ensure that sufficient equity and long-term debt are available and the banking organization has capacity to absorb losses.18 Currently, TLAC requirements incorporate the eSLR’s fixed 2% buffer. This means that in addition to the minimum 7.5% leverage-based TLAC requirement, a GSIB is required to maintain a buffer of at least 2% of its total leverage exposure.19 The proposal would revise these requirements to align with the recalibrated eSLR buffer, effectively resulting in a 5% reduction in TLAC requirements for GSIBs. This change is expected to lower GSIBs’ funding costs.20
Additionally, TLAC requirements mandate that GSIBs hold eligible LTD of at least 4.5% of their total leverage exposure.21 Once aligned with the revised eSLR buffer, the LTD requirement for GSIBs would be reduced to 2.5%, plus an additional 50% of the GSIB’s Method 1 surcharge.22
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.
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1 Federal Reserve, FDIC, OCC, Regulatory Capital Rule: Modifications to the Enhanced Supplementary Leverage Ratio Standards for U.S. Global Systemically Important Bank Holding Companies and Their Subsidiary Depository Institutions; Total Loss-Absorbing Capacity and Long-Term Debt Requirements for U.S. Global Systemically Important Bank Holding Companies.
2 Basel Committee, Basel III Leverage Ratio Framework and Disclosure Requirements (Jan. 2014).
3 eSLR Proposal (June 25, 2025).
4 12 C.F.R. §217.10(a)(1)(iv).
5 12 C.F.R. §3.10(a)(1)(v) (OCC), §217.10(a)(1)(v) (Federal Reserve), §324.10(a)(1)(v) (FDIC).
6 12 C.F.R. §§217.10(c) and 217.11(a)(2)(v).
7 12 C.F.R. §§217.11(a)(2)(v) and 217.11(c)(4), and Table 2 to §217.11(c)(4).
8 In addition, their depository institutions subsidiaries must hold an SLR of at least 6% to be considered “well-capitalized” by the banking agencies under the prompt corrective action framework. See 12 C.F.R. §6.4(b)(1)(i)(D)(2) (OCC), §208(b)(1)(i)(D)(2) (Federal Reserve), and §324.403(b)(1)(ii) (FDIC).
9 Federal Reserve press releases “Federal Reserve Board Announces Temporary Change to its Supplementary Leverage Ratio Rule to Ease Strains in the Treasury Market Resulting From the Coronavirus and Increase Banking Organizations’ Ability To Provide Credit to Households and Businesses” (April 1, 2020); “Federal Reserve Board Announces That the Temporary Change to its Supplementary Leverage Ratio (SLR) for Bank Holding Companies Will Expire as Scheduled on March 31” (March 19, 2021).
10 Jerome H. Powell, Statement on Enhanced Supplementary Leverage Ratio Proposal (June 25, 2025); Michelle W. Bowman, Statement on Enhanced Supplementary Leverage Ratio Proposal (June 25, 2025).
11 GSIBs are subject to an additional surcharge designed to offset the systemic risk they pose due to their size and importance. Under Method 1, this additional capital requirement is calculated according to a risk-based framework established by the Federal Reserve that considers five equally-weighted categories: (i) size, (ii) interconnectedness, (iii) substitutability, (iv) complexity and (v) cross-jurisdictional activity. See 12 C.F.R §217.402.
12 eSLR Proposal (June 25, 2025).
13 Financial Stability Board, 2024 List of Global Systemically Important Banks (GSIBs) (Nov. 26, 2024).
14 Similarly, the flat 6% requirement for insured depository institution subsidiaries of GSIBs would be replaced with a buffer equal to 50% of the parent GSIB’s Method 1 surcharge. See eSLR Proposal (June 25, 2025).
15 eSLR Proposal (June 25, 2025).
16 eSLR Proposal (June 25, 2025).
17 eSLR Proposal (June 25, 2025).
18 See 80 FR 74926 (Nov. 30, 2015).
19 12 C.F.R. §252.63(c)(2)(iv), Table 2 to §252.63.
20 eSLR Proposal (June 25, 2025).
21 12 C.F.R. §252.62(a)(2).
22 eSLR Proposal (June 25, 2025).