In a move that could significantly reshape the regulatory landscape for the country’s largest financial institutions, the U.S. Federal Reserve has proposed substantial revisions to the rules governing leverage ratios. These changes, aimed at easing certain capital requirements for globally active banks, represent a recalibration of the post-crisis safeguards introduced in the aftermath of the 2008 financial meltdown.

Understanding the Enhanced Supplementary Leverage Ratio (eSLR)

The Enhanced Supplementary Leverage Ratio (eSLR) was originally designed to ensure that the largest and most complex financial institutions maintain a robust cushion of capital relative to their total assets, regardless of the risk profile of those assets. This measure was especially important for institutions designated as Global Systemically Important Banks (GSIBs), whose failure could pose significant risks to the global financial system.

Under the current framework, GSIBs operating in the United States are subject to a baseline supplementary leverage ratio of 3%, with an additional buffer of 2%, bringing the total eSLR requirement to 5% for holding companies. Their depository institution subsidiaries face an even higher standard — a total leverage requirement of 6%.

What’s Changing?

The Federal Reserve’s new proposal outlines a fundamental shift in how these buffers are calculated and applied. Instead of the fixed 2% buffer currently applied to top-tier bank holding companies, the proposed rule would tie the buffer directly to the systemic importance of each bank. Specifically, the new buffer would equal 50% of the bank’s GSIB surcharge — a separate capital add-on that varies depending on a bank’s size, interconnectedness, complexity, and other systemic risk indicators.

For example, a GSIB with a surcharge of 4% would now face an eSLR buffer of just 2% under the proposed framework, compared to the current static buffer of 2%. For many banks, this alignment would result in a modest reduction in their required capital levels.

For depository institution subsidiaries — the actual banks that take deposits and make loans — the changes are even more dramatic. The current 3% minimum plus 3% buffer (for a total of 6%) would also be replaced with a buffer equal to 50% of the parent GSIB’s surcharge. This adjustment reflects a more tailored approach, aligning leverage requirements more closely with the actual risk and complexity of the institution.

The Impact in Numbers

The recalibration of leverage requirements is expected to have a measurable impact on the capital held by major banks. At the holding company level, the proposed rule would lower aggregate tier 1 capital requirements by an estimated 1.4%, or roughly $13 billion. While modest in percentage terms, this reduction is meaningful in the context of capital management and shareholder returns.

For the depository institution subsidiaries, the change is much more pronounced. The capital requirement for these subsidiaries would fall by approximately 27%, freeing up an estimated $213 billion in capital. This substantial reduction could give banks more flexibility to deploy capital toward lending, investments, or share buybacks — though it may also raise questions about the sufficiency of protections in a downturn.

A Shift Toward Risk Sensitivity

The overarching theme of the Federal Reserve’s proposal is a shift toward a more risk-sensitive and institution-specific regulatory framework. By linking leverage requirements more directly to a bank’s GSIB surcharge, the proposal seeks to better match capital requirements with actual systemic risk, rather than applying a one-size-fits-all rule.

Critics of the current leverage rules have argued that they can disincentivize banks from holding low-risk assets like U.S. Treasuries, which count against leverage exposure even though they carry minimal credit risk. By reducing overly stringent leverage constraints, the Fed appears to be responding to these concerns while still maintaining core safeguards against excessive risk-taking.

What Comes Next?

The proposal will go through a public comment period, during which regulators, industry stakeholders, and consumer advocates will weigh in on its merits and potential consequences. If adopted, the changes would mark a significant step in the Federal Reserve’s ongoing efforts to refine and modernize the regulatory framework for large financial institutions.

While the proposal is likely to be welcomed by the banking industry, it is also sure to attract scrutiny from those concerned about loosening post-crisis safeguards. The ultimate balance between financial flexibility and systemic stability remains at the heart of this regulatory evolution.