Fed Proposes Major SLR Overhaul for GSIBs, Aims to Boost Treasury Market Stability

The Federal Reserve, in coordination with the FDIC and the Office of the Comptroller of the Currency, has proposed sweeping changes to the Enhanced Supplementary Leverage Ratio (eSLR) that would significantly ease capital requirements for the largest U.S. banks. The move, announced Wednesday, is intended to transform the leverage ratio back into a capital “backstop” rather than a binding constraint, particularly as banks increasingly hold low-risk assets such as U.S. Treasuries.

The central tenet of the proposal is to tie the eSLR buffer directly to a bank’s GSIB surcharge, rather than a flat percentage across the board. Specifically, instead of the existing 2% buffer at the holding company level and 3% minimum SLR at the subsidiary level, the new rule would calibrate the buffer to 50% of a GSIB's surcharge. This means that a GSIB with a 4% surcharge would now face a 2% eSLR buffer, aligning leverage requirements more proportionally with systemic risk profiles.

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The monetary implications of the proposal are significant. According to the Fed’s estimates, capital requirements for depository institution subsidiaries of GSIBs would drop by 27%, or approximately $213 billion. Meanwhile, the parent-level bank holding companies would see a more modest reduction of 1.4%, freeing up about $13 billion in Tier 1 capital. This adjustment is intended not to reduce overall systemic safety but rather to allow banks to reallocate capital more efficiently and resume market-making activity in critical areas like U.S. Treasuries.

The policy shift aims to address what Fed officials have long viewed as a growing imbalance in post-2008 regulations. The SLR, initially designed as a blunt safeguard, has become binding in recent years due to the rapid accumulation of safe assets like reserves and Treasuries on bank balance sheets. Fed Chair Jerome Powell underscored this point in prepared remarks, calling it “prudent” to revise the ratio in light of today’s asset mix. “We want the SLR to serve as a true backstop—not an impediment to low-risk market participation,” Powell said.

The rule is still in the proposal stage and will be subject to a 120-day public comment period before any implementation. However, it already triggered clear fault lines among Fed leadership. The proposal passed with a majority, but Governors Michael Barr and Adriana Kugler both dissented, citing concerns that the reduction in capital buffers could heighten financial system risk. Barr, who previously served as the Fed’s top regulatory official under President Biden, warned the proposed changes “unnecessarily and significantly reduce bank-level capital,” and could “increase the risk that a GSIB bank would fail.”

In contrast, Fed Vice Chair for Supervision Michelle Bowman supported the move, arguing it will improve liquidity and resilience in Treasury markets—an objective echoed by Treasury Secretary Scott Bessent. Bowman emphasized that the relaxed requirements would not increase shareholder payouts, as holding companies would still face higher capital thresholds, but rather allow internal capital optimization across entities.

Markets reacted favorably to the announcement, interpreting it as a tailwind for GSIBs and a structural positive for Treasuries. Analysts noted that a lower eSLR would incentivize large banks to increase participation in both primary auctions and secondary trading of government bonds. This added demand could help absorb the growing supply of U.S. debt—particularly relevant as the Congressional Budget Office projects a nearly $2.8 trillion increase in the federal deficit between 2025 and 2034 under the current fiscal trajectory.

While proponents of the rule argue that the change will reduce volatility in the bond market and enhance liquidity during stress events, not everyone is convinced. Senator Elizabeth Warren issued a strongly worded letter condemning the proposal, arguing it would lead to more dividends, buybacks, and executive compensation rather than increased lending or economic stability. “If the banking agencies gut this requirement, the big banks will load up on more debt… and put the entire economy at risk of another financial crash,” she wrote.

The practical timeline for implementation remains unclear, as the rule must be finalized following the comment period and further regulatory review. If adopted, the move would mark a pivotal shift away from the post-crisis capital regime and toward a more flexible regulatory architecture aimed at supporting financial market functioning—particularly in the $29 trillion U.S. Treasury market.

In parallel, the Fed signaled it plans to revisit other aspects of the Basel III framework, with Powell noting the Board would take “a fresh start” on capital reforms, potentially opening the door to further deregulatory measures.

For now, the debate over the eSLR underscores the broader tension between maintaining systemic safety and enhancing market efficiency. The coming months will reveal whether the Fed can strike the right balance—or whether critics' fears of undercapitalized megabanks will gain traction in an already contentious regulatory environment.