FDIC sends draft leverage ratio rule to OIRA for review

Bloomberg News

The Federal Deposit Insurance Corp. Friday submitted a draft rule to the Office of Information and Regulatory Affairs — a branch of the Office of Management and Budget that now reviews FDIC regulations — that would modify rules for banks' supplementary leverage capital, a critical capital backstop.

The notice of intent to publish the rule was posted on OIRA's website Friday, entitled "Modifications to Supplementary Leverage Capital Requirements for Large Banking Organizations; Total Loss-Absorbing Capacity Requirements for US Global Systemically Important Bank Holding Companies." The SLR currently is a joint rulemaking between the FDIC, Office of the Comptroller of the Currency and Federal Reserve. The FDIC has not historically sent rules to OIRA for review, but a February executive order issued by President Trump brings the rulemaking process for independent agencies under the OMB review process.

The move from the FDIC is in line with priorities expressed by other Trump administration appointees like Federal Reserve Vice Chair for Supervision Michelle Bowman, who said in a speech Friday she supported a full review of all the capital requirements banks face, including the supplemental leverage ratio.

Treasury Secretary Scott Bessent in March signaled a willingness to reexamine the SLR. While the regulation was intended as a safeguard to make sure banks hold enough capital against even seemingly safe assets, Bessent floated the idea of exempting facially safe assets like short-duration Treasuries from the SLR to allow banks to trade more T-bills and, in his view, act as a "stabilizing force" on the market.

"Treasuries are not treated as such when the leverage restriction is applied [and] some have suggested that risk-free exposures, like central bank reserves and short-duration Treasuries, should not be capitalized even under a risk-insensitive leverage capital restriction, while others have suggested an adjustment to the leverage restriction buffer," Bessent said. "Rigorous analysis must be applied to these regulations if we are to appropriately supervise and regulate our banks."

Acting Comptroller of the Currency Rodney Hood last week said the OCC is working to modernize capital standards and reviewing the SLR  — a simple capital standard that represents the ratio of total assets to total liabilities — to ensure it serves as a capital backstop rather than a binding constraint on banks. While he emphasized that U.S. banks remain the "gold standard" globally, he rejected the idea of "gold-plating" capital rules — adding more stringent layers than international norms explicitly require.

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Leverage ratios are designed to apply uniformly to all a firm's assets, regardless of each asset's perceived risk, which is why they are often smaller than risk-based capital standards and harder to manipulate, acting as a secondary safety net. During the COVID-19 pandemic the regulators briefly allowed banks to exclude Treasuries and allowed large banks to appear better capitalized than they would otherwise if their Treasury bond debt was factored in.

While Trump appointees are on board with the rollback, the idea has received mixed reviews from some observers in the past. Former Republican FDIC Chair Sheila Bair said in a 2020 op-ed that loosening the SLR would amount to backsliding on Dodd-Frank reforms that protected the market from moral hazard, encouraging banks to buy government debt and increasing systemic risks. 

"While this change has been touted by its advocates as increasing lending, it will create incentives to do just the opposite," she said in the 2020 op-ed. "Banks will now have greater opportunities to dress up their risk based ratios as well."

Banking expert Todd Baker, managing principal of Broadmoor Consulting LLC, said in a recent op-ed that the change could inflate bank balance sheets with low-risk assets, weaken hard-fought reforms from the Dodd-Frank Act after the financial crisis and enable a kind of "shadow" monetary policy, whereby the Treasury could stimulate the economy outside the Fed's control if it chose to coerce large banks to buy Treasuries.