Enhanced Supplemental Leverage Ratio (eSLR): Recent Developments and Comprehensive Analysis
Recent News Developments
On June 25, 2025, the Federal Reserve made headlines by proposing significant changes to the enhanced supplementary leverage ratio (eSLR) affecting the nation's largest banks^1. The Fed's board voted 5-2 to advance the proposal, which would modify capital requirements for global systemically important banks (GSIBs)^2. This regulatory shift represents a notable step toward deregulation in the banking sector, fulfilling a long-standing request from the financial industry.
The proposal emerged just one day before the announcement, when Federal Reserve Chairman Jerome Powell indicated during a congressional hearing that modifications to the eSLR formula were forthcoming^4. The Office of the Comptroller of the Currency (OCC) joined the Federal Reserve in this initiative, while the Federal Deposit Insurance Corporation (FDIC) is expected to participate in the proposal at a separate board meeting^5.
Key aspects of the recent proposal include replacing the current flat 2% eSLR buffer for GSIBs with a buffer equal to half of each bank's method 1 surcharge under the risk-based GSIB framework^1. For GSIB bank subsidiaries, the proposal would similarly replace the 3% eSLR buffer with half of the parent company's method 1 surcharge^5.
Industry reaction has been overwhelmingly positive, with the American Bankers Association calling it "an important step toward strengthening our financial system" and noting that it would reduce bank funding costs while allowing institutions to better support the economy^1. The Bank Policy Institute emphasized that the changes would have a minimal effect on large banks' capital—just a 0.74% reduction—while helping restore risk-based capital as the primary constraint^9.
However, the proposal has faced criticism from some quarters. Two Federal Reserve board members dissented from the 5-2 vote, and critics like former FDIC Chair Sheila Bair warn that reducing capital requirements increases leverage and diminishes system resilience^10. Senator Elizabeth Warren has expressed significant concerns, arguing that weakening the requirement would allow major banks to accumulate more debt and endanger the economy^4.
Understanding the Enhanced Supplementary Leverage Ratio
Definition and Calculation
The enhanced supplementary leverage ratio (eSLR) is a regulatory capital requirement that applies specifically to the largest U.S. banks designated as global systemically important banks (GSIBs)^11. It represents the U.S. implementation of leverage ratio standards established under the Basel III international regulatory framework^13.
The eSLR is calculated as a bank's Tier 1 capital divided by its total leverage exposure, expressed as a percentage^11. Total leverage exposure includes both on-balance sheet assets (such as loans and securities) and off-balance sheet exposures (including derivatives and other financial instruments)^11. This comprehensive measure was designed to capture the full scope of a bank's leverage, including items that might not appear directly on the balance sheet but still generate income and risk^17.
Currently, GSIBs must maintain an eSLR of at least 5% (3% base requirement plus 2% buffer), while their depository institution subsidiaries face a 6% requirement (3% base plus 3% buffer)^12. This contrasts with the standard 3% supplementary leverage ratio (SLR) that applies to other large banks with more than $250 billion in assets^15.
Historical Context and Implementation
The supplementary leverage ratio was first established in 2014 as part of the Basel III reforms implemented following the 2007-2009 financial crisis^11. The banking sector entered the crisis with excessive leverage and inadequate liquidity buffers, weaknesses that were accompanied by poor governance and risk management practices^20.
The Basel Committee on Banking Supervision developed the leverage ratio framework to address these deficiencies, recognizing that risk-based capital requirements alone had proven insufficient^20. Many banks had reported strong risk-based capital ratios while still accumulating dangerous levels of on- and off-balance sheet leverage^17.
The enhanced version specifically targeting GSIBs was finalized in 2014, with requirements becoming effective in 2018^12. The eSLR was originally designed to serve as a "backstop" to risk-based capital requirements—a supplementary measure that would rarely be the determining factor in a bank's capital adequacy^7. However, market conditions and regulatory dynamics have caused it to frequently become the "binding constraint" that actually limits banks' activities^21.
Impact on Capital Structure and Regulatory Capital
Role as Backstop vs. Binding Constraint
The fundamental issue driving recent regulatory attention is that the eSLR has evolved from its intended role as a backstop into a regularly binding constraint^7. Vice Chair for Supervision Michelle Bowman explained that when the eSLR was adopted in 2014, it was meant to complement risk-based capital requirements, not replace them as the primary limiting factor^7.
The transformation from backstop to binding constraint has occurred due to several factors. Banks have increased their holdings of high-quality liquid assets, particularly U.S. Treasury securities and Federal Reserve deposits, following post-crisis regulatory requirements^21. While these assets carry zero risk weight under risk-based capital calculations, they count at 100% under leverage ratios^21.
Data from the Federal Reserve shows that the ratio of risk-weighted assets to total leverage exposure for the eight largest U.S. banks has declined from 48% in the mid-2010s to 40% currently^21. This downward trend indicates that leverage ratios are increasingly becoming the binding constraint rather than risk-based requirements^21.
Effects on Bank Capital Allocation
When the eSLR becomes binding, it creates perverse incentives in bank capital allocation^22. Banks facing leverage constraints are incentivized to reduce engagement in lower-risk, lower-return activities and instead pursue higher-risk activities that generate better returns relative to the leverage exposure^7.
This dynamic particularly affects Treasury market intermediation, where banks earn relatively low returns but face full leverage exposure^21. The constraint has led to reduced liquidity in Treasury markets, as banks limit their market-making activities and holdings of government securities^23.
Research from the Boston Federal Reserve demonstrates this effect empirically. During the COVID-19 pandemic, the Fed temporarily excluded Treasury securities and Federal Reserve deposits from SLR calculations. This policy change boosted banks' median SLR by more than 1 percentage point and coincided with improved Treasury market liquidity, as measured by declining volatility^19.
Why the eSLR Became a Talking Point
Treasury Market Functioning Concerns
The eSLR has become a focal point of regulatory debate primarily due to its impact on Treasury market functioning^21. U.S. Treasury markets are critical to global financial stability, serving as the foundation for risk-free asset pricing and providing liquidity during stress periods^19.
GSIBs play a crucial role in Treasury market intermediation and own the six largest primary dealers in U.S. Treasury securities^8. When leverage requirements constrain these banks' ability to hold Treasury securities or facilitate trading, it can impair market liquidity and increase volatility^21.
The issue has gained particular urgency as Treasury market size has grown significantly. As House Task Force Chair Frank Lucas noted, "The Treasury market has doubled in size since I was on the Dodd-Frank conference committee"^24. This growth, combined with increased issuance needs, has made effective bank intermediation even more critical^24.
Political and Industry Pressure
The banking industry has consistently advocated for eSLR reform, arguing that the requirement has become overly restrictive^1. Industry groups like the Bank Policy Institute and American Bankers Association have lobbied extensively for changes, emphasizing that the current framework impedes banks' ability to support economic growth^1.
Political support for reform has grown, with senior policymakers including Treasury Secretary Scott Bessent flagging SLR reform as a priority^24. Bipartisan congressional attention has focused on the relationship between leverage requirements and Treasury market functioning^24.
The Trump administration's deregulatory agenda has provided additional momentum for reform efforts^4. Vice Chair for Supervision Bowman, nominated by President Trump, has made capital framework reform a priority, describing current requirements as "distorted"^4.
International Competitiveness
Regulatory alignment with international standards has also driven reform discussions^7. The proposed changes would more closely align U.S. requirements with the Basel leverage ratio standard, addressing concerns that overly stringent domestic requirements disadvantage U.S. banks relative to international competitors^1.
Recent Developments and Future Outlook
The June 2025 Proposal Details
The Federal Reserve's June 25, 2025 proposal represents the most significant eSLR reform effort since the requirement was implemented^2. The proposal would fundamentally change how the eSLR buffer is calculated, moving from a flat percentage to a risk-based approach^7.
For GSIBs, the current 2% eSLR buffer would be replaced with half of each bank's method 1 surcharge calculation^7. This approach would tailor requirements to each institution's systemic footprint, with larger, more complex banks facing higher requirements^22.
The proposal would reduce aggregate Tier 1 capital requirements for GSIBs by 1.4%^26. However, capital requirements at depository institution subsidiaries would see larger reductions, though most of this capital would remain within the banking organization due to holding company requirements^22.
Importantly, the proposal does not adopt the approach used during the COVID-19 pandemic of excluding Treasury securities and Federal Reserve deposits from SLR calculations^8. Instead, it seeks public comment on various alternatives, including excluding Treasuries held for trading at broker-dealer affiliates or excluding all U.S. Treasuries and reserves^7.
Timeline and Implementation
The proposal includes a 60-day public comment period, indicating that final implementation could occur in late 2025 or early 2026^26. The FDIC is expected to join the proposal at a separate board meeting, having already submitted its version to the Office of Information and Regulatory Affairs for review^6.
The regulatory agencies are working to coordinate their approaches across the Fed, OCC, and FDIC^6. This coordination is essential given that different agencies regulate different types of banking institutions subject to the eSLR.
Broader Regulatory Context
The eSLR proposal is part of a broader expected deregulatory agenda under the Trump administration^4. Vice Chair Bowman has indicated that leverage ratio reform is a preliminary step toward broader capital framework changes^4.
Future modifications may include weakening additional surcharges on large global banks and adjusting thresholds that trigger enhanced regulatory requirements^4. However, any comprehensive reform will likely face extended timelines given the complexity of coordinating between multiple agencies and international standards^28.
Market and Industry Implications
The proposed changes are expected to have significant implications for Treasury market functioning^23. Analysts estimate that for every 1% reduction in SLR requirements, a major bank's Treasury holdings could increase by up to $10 billion^23. The overall adjustment could free up $200-300 billion in bank capital for Treasury market activities^23.
Major banks including JPMorgan Chase, Bank of America, and Citigroup would benefit from increased flexibility in capital allocation^23. The changes would particularly benefit bank-affiliated broker-dealers that play critical roles in Treasury market intermediation^7.
However, critics warn that easing capital requirements could increase systemic risk^10. The debate reflects broader tensions between promoting market functioning and maintaining financial stability safeguards established after the 2008 crisis^10.
The ultimate impact will depend on final rule details, implementation timelines, and how banks choose to utilize their increased capital flexibility. The regulatory community will be closely monitoring market effects and may adjust approaches based on observed outcomes and stakeholder feedback during the comment period.