EXECUTIVE SUMMARY:
- The proposal would modify the eSLR standards applicable to U.S. GSIBs and their depository institution subsidiaries to help ensure that supplementary leverage ratio requirements generally serve as a backstop to risk-based capital requirements, rather than as a regularly binding constraint.
- By reducing the likelihood that supplementary leverage ratio requirements would be a regularly binding or near-binding constraint, the proposed changes would reduce regulatory disincentives for GSIBs to engage in lower-risk, lower-return activities, such as U.S. Treasury market intermediation, which would in turn support functioning of the U.S. Treasury market.
- GSIBs play an important role in U.S. Treasury market intermediation and own the six largest primary dealers in U.S. Treasury securities.
- The proposal would modify the eSLR standards by applying an eSLR buffer at the GSIB parent and each depository institution subsidiary equal to half of the GSIB’s method 1 surcharge under the Board’s risk-based GSIB surcharge framework and make conforming changes to the Board’s TLAC and long-term debt requirements for GSIBs.
- The proposed modification to the eSLR standards would reduce the supplementary leverage ratio requirement below the level of the risk-based tier 1 capital requirement for all GSIBs and most of their depository institution subsidiaries.
- The proposal would reduce aggregate tier 1 capital requirements for GSIBs by 1.4 percent.
- Although tier 1 capital requirements at depository institution subsidiaries would decline by more, almost all of this capital would not become available for distribution to shareholders because of holding company capital requirements.
- The draft notice of proposed rulemaking would provide 60 days for public comment.
The full proposal is available here.
In response, the Bank Policy Institute said “Adjusting the eSLR would have a de minimis effect on large banks’ capital—just a 0.74% reduction based on the latest available data. Postulations that it materially lowers capital are misleading, as the proposal restores risk-based capital as the primary constraint.”
The Investment Company Institute said “We welcome today’s announcement that the Federal Reserve Board is proposing a change to the onerous enhanced supplementary leverage ratio (eSLR) for banks, which will allow them to play a larger role in market-making and help ease stresses in US Treasury markets. The modifications to loosen the eSLR should be acted on with urgency.”
SIFMA said that “With U.S. Treasury issuance set to grow rapidly, and with volatility in the market top of mind, lowering the supplementary leverage ratio buffer requirement does not address the disincentives that large banking organizations face. Thus, we encourage the Agencies to exempt Treasuries and central bank deposits from leverage ratio calculations going forward.”