Key Insight: The enhanced supplemental leverage ratio was adjusted to be half of a bank's Global Systemically Important Bank surcharge, cutting headline capital requirements while reaffirming risk-based capital rules as the primary binding constraint for banks.
Supporting data: The new rule cuts banks' Tier 1 capital needs by less than 2% for the GSIBs, but cuts capital by 28% for some big bank subsidiaries.
Forward look: Analysts see momentum for broader capital simplification, including in an as-yet unreleased Basel III endgame proposal.
Federal banking regulators Tuesday finalized a final rule that reduces the enhanced supplementary leverage ratio for global systemically important banks and their largest bank subsidiaries.
The Federal Deposit Insurance Corp., Office of the Comptroller of the Currency and Federal Reserve quietly finalized the rule Tuesday morning, with the FDIC and OCC passing the measure unanimously and the Fed approving the final rule by a vote of 5-2. Proponents of the rule billed the change as a means to ease capital requirements for low-risk activities like Treasury market intermediation while returning the risk-based framework to its central role in directing capital allocation. FDIC staff estimated the change reduces Tier 1 capital requirements by less than 2% for GSIBs and by 28% for applicable depository institutions.
"The proposal was designed to help ensure that the eSLR more frequently serves as a backstop to risk based capital requirements, rather than as a binding constraint, thus reducing potential disincentives for GSIBs and their bank subsidiaries to participate in low risk, low return activities," Acting FDIC Chair Travis Hill said. "Today, the FDIC Board is considering a final rule that would be substantially equivalent to the proposed rule with one modification … standards for the bank subsidiary would be modified to equal 50% of the parent company's method 1 GSIB capital surcharge, capped at 1%."
The agency's move lowers the enhanced leverage ratio to 3%, plus half of a firm's Method 1 GSIB surcharge, capping the bank-level requirement at 4 percent. The rule takes effect April 1, 2026, but banks may elect to voluntarily comply by January 1.
The final rule also converts the eSLR for depositories from a prompt corrective action threshold to a leverage buffer, meaning banks' compliance with the eSLR wouldn't directly affect their status as "well capitalized."
Banking analyst Jaret Seiberg of TD Cowen said the move signals additional pending capital simplification could provide banks substantial relief.
"This bodes well for capital rule revisions that will be more material for mid-size and large banks including the forthcoming Basel III Endgame capital proposal and the expected revamp of the GSIB surcharge calculation," Seiberg said.
Kenneth E. Bentsen, Jr., president of the Securities Industry & Financial Markets Association, a Wall Street trade association, likewise applauded the final rule.
"SIFMA strongly supports restoring the eSLR to its proper role as a backstop to risk-based capital requirements and mitigating limitations on the ability of banking organizations to intermediate in U.S. Treasury markets," Bentsen said. "We encourage the agencies to consider revisions to Tier 1 leverage ratio requirements in future rulemaking as part of a broader review of the U.S. regulatory capital and leverage framework and the negative effects of the Tier 1 leverage ratio on U.S. Treasury market intermediation."
The Bank Policy Institute called the move an "overdue reform" that provides economic benefits to the Treasury market.
"It will improve market liquidity and banks' capacity to intermediate in Treasury and other capital markets, especially during stress," BPI's President Greg Baer said. "This reform will leave banks exceedingly well capitalized, with the binding requirement no longer a risk-insensitive leverage ratio but rather risk-based requirements under the Basel regime, the GSIB surcharge and the Federal Reserve's stress capital charge."
Fed Governor Stephen Miran supported the finalization of the interagency rule, but expressed support for regulators going even further and excluding Treasurys and U.S. central bank reserves from the supplementary leverage ratio denominator.
"Our current regulatory framework governing liquidity requires banks to hold these instruments as high quality liquid assets to cover potential outflows. It is unreasonable to impose such a
requirement and then penalize these holdings by requiring that capital be held against them
through the leverage capital requirements," Miran wrote in a statement. "Dealer intermediation of the Treasury market can suffer if banks are forced to hold capital just to support their Treasury and repo trading books, which often are low-return, low-risk, high volume activities. … Removing these securities from the supplementary leverage ratio would also help insulate the Treasury market from stressful episodes"
The final rule was nonetheless not without its critics. Fed Governor Lisa Cook, who voted against the final rule, said the "economically significant" overall reduction in capital was concerning, leading her to withhold her support.
"I am sympathetic to the rule's recalibration of the eSLR at the holding-company level," she wrote. "However, as I noted during the open board meeting on the proposal, we should carefully consider the implications of capital flowing out of GSIB bank subsidiaries. … Bank-level capital remains fundamental to maintaining bank-level solvency and protecting the depository insurance fund."
Senate Banking Committee ranking member Elizabeth Warren, D-Mass., criticized the move, calling it a handout to Wall Street banks that could result in an economic crisis that could weaken the economy.
"Donald Trump is setting the stage for more Wall Street bailouts and devastating financial crashes," Warren wrote. "His banking regulators just gave megabanks the green light to load up on more debt and operate with even thinner financial cushions — putting the entire economy at risk."
Regulators also issued a proposal to reduce the community bank leverage ratio, or CBLR, to 8% from 9% and extend the compliance grace period to a year, available so long as a bank hasn't used that extension in more than eight of the past 20 quarters. Officials said they aim to finalize the change this summer, with an effective date as early as October 1, 2026.
"The CBLR is intended to provide a simple measure of capital adequacy for qualifying community bank organizations, the CBLR rule removes the requirement for calculating and reporting risk based capital ratios for banks that opt into the framework," Hill said. "At the same time, the CBLR is set well above the minimum tier 1 leverage ratio to ensure that banks that opt in continue to maintain strong capital levels."
Federal Reserve Gov. Michael Barr, who had served as the Fed's vice chair for supervision until this past February, said he supported the issuance of the proposal but was interested in learning more about whether certain community bank business models should be excluded from eligibility for the CBLR. Barr also said he was interested in learning more about which banks opt into the CBLR versus those who do not.
"While the vast majority of community banks have traditional risk profiles, I'd be interested in understanding whether there are mechanisms to ensure that eligible banks with nontraditional, higher-risk profiles have capital requirements commensurate with their risk or should be excluded from eligibility," Barr said. "It would also be helpful to have information about the risk profiles of firms that do and do not opt in to CBLR."
Independent Community Bankers of America President and CEO Rebeca Romero Rainey said the move, which they advocated for, will free up community bank funds to lend.
"As ICBA said in a recent letter to the federal banking regulators and in a letter to the Federal Reserve earlier this year, reducing the CBLR from 9% to 8% will provide community banks additional room on their balance sheets to meet the credit needs of their local communities to support ongoing economic growth," Romero Rainey wrote. "Helping community banks build capital and lend in their communities is a key ICBA priority."
