Warren slams push to revise supplementary leverage ratio

Bloomberg News

Senator Elizabeth Warren, D-Mass., urged federal banking regulators not to water-down the enhanced supplementary leverage ratio when they consider changes to the rule later this week, saying the measure is "one of the most important post-2008 financial crisis safeguards."

In a letter to the heads of the Federal Reserve, Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency, Warren argued that exempting Treasuries from the calculation of the ratio — as has been suggested by Treasury Secretary Scott Bessent — would weaken the economy because better-capitalized firms perform better over the long term. Weakening the eSLR, she says, would allow firms to cash in on increased dividends, buybacks, and bonuses at the expense of financial stability. 

"Bank lobbyists often mislead policymakers and the public by implying that capital is cash held in a vault … the implication of this fib is that easing the eSLR would free up a pot of money for banks to lend more or buy more assets, like Treasuries, [but] these claims ignore the facts," Warren wrote. "Bank capital, like deposits and other sources of bank debt, is invested in the economy — it is not money locked in a vault. Big banks would much rather have risk-weighted capital requirements be their primary constraint, since they know how to manipulate them."

In June, 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.

Warren, a well-known and vocal critic of deregulation, said the rule's rollback would let megabanks operate with dangerously thin capital buffers.

"The eSLR requires that for every $95 of borrowed money used to finance loans and other investments, Wall Street banks must also use at least $5 of their own money," Warren wrote. "Megabanks must have their own skin in the game to absorb losses and ensure they can continue offering financial services to households and businesses in periods of stress, instead of collapsing, destabilizing the financial system, and begging for bailouts."

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The letter also defends the eSLR as a straightforward, risk-neutral standard that prevents banks from manipulating capital rules by misclassifying risky assets. The letter also dismisses claims that the eSLR inhibits Treasury market liquidity, saying big banks did not increase intermediation during recent times of stress.

"Any current issues in the Treasury market appear to be driven by investors' reaction to President Trump's economic mismanagement — not by the plumbing of the market or the capacity of banks to buy Treasuries," Warren said. "[During COVID] at the insured depository level, only two banks elected to take advantage of the deregulatory treatment in the first place. Others refused, because doing so would have placed limitations on payments to shareholders."

Federal Reserve Vice Chair for Supervision Michelle Bowman — who was sworn in to the post earlier this month — expressed support for a full review of all the capital requirements banks face, including the supplemental leverage ratio, in a speech days before the FDIC rule submission.

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.

Acting Comptroller of the Currency Rodney Hood earlier this month 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 standards require.