Rule2025-21626
Regulatory Capital Rule: Modifications to the Enhanced Supplementary Leverage Ratio Standards for U.S. Global Systemically Important Bank Holding Companies and Their Subsidiary Depository Institutions; Total Loss-Absorbing Capacity and Long-Term Debt Requirements for U.S. Global Systemically Important Bank Holding Companies
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 1, 2025
Effective
April 1, 2026
Issuing agencies
Treasury DepartmentComptroller of the CurrencyFederal Reserve SystemFederal Deposit Insurance Corporation
Abstract
The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), and Federal Deposit Insurance Corporation (FDIC) are adopting a final rule to modify the enhanced supplementary leverage ratio standards applicable to U.S. bank holding companies identified as global systemically important bank holding companies (GSIBs), their subsidiary depository institutions that are Board- or FDIC-regulated, and national banks and Federal savings associations that are subsidiaries of a U.S. top-tier bank holding company with total consolidated assets of more than $700 billion or assets under custody of more than $10 trillion (together with Board- and FDIC-regulated subsidiary depository institutions of GSIBs, covered depository institutions). These modifications are intended to help ensure that the enhanced supplementary leverage ratio standards serve as a backstop to risk-based capital requirements rather than a frequently binding constraint, thus reducing potential disincentives for GSIBs and covered depository institutions to participate in low-risk, low-return activities. The Board is also finalizing conforming amendments to its total loss-absorbing capacity and long-term debt requirements. In addition, the Board is making conforming amendments to relevant regulatory reporting forms, and the Board and FDIC are making final certain technical corrections to the capital rule and the prompt corrective action framework. Banking organizations subject to the final rule may elect to early adopt the final rule as of January 1, 2026.
Full Text
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[Federal Register Volume 90, Number 228 (Monday, December 1, 2025)]
[Rules and Regulations]
[Pages 55248-55292]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-21626]
[[Page 55247]]
Vol. 90
Monday,
No. 228
December 1, 2025
Part II
Department of the Treasury
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Office of the Comptroller of the Currency
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12 CFR Parts 3 and 6
Federal Reserve System
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12 CFR Parts 208, 217, and 252
Federal Deposit Insurance Corporation
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12 CFR Part 34
Regulatory Capital Rule: Modifications to the Enhanced Supplementary
Leverage Ratio Standards for U.S. Global Systemically Important Bank
Holding Companies and Their Subsidiary Depository Institutions; Total
Loss-Absorbing Capacity and Long-Term Debt Requirements for U.S. Global
Systemically Important Bank Holding Companies; Final Rule
Federal Register / Vol. 90 , No. 228 / Monday, December 1, 2025 /
Rules and Regulations
[[Page 55248]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Parts 3 and 6
[Docket ID OCC--2025-0006]
RIN 1557-AF31
FEDERAL RESERVE SYSTEM
12 CFR Parts 208, 217, and 252
[Regulations H, Q, and YY; Docket No. R-1867]
RIN 7100-AG96
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 324
RIN 3064-AG11
Regulatory Capital Rule: Modifications to the Enhanced
Supplementary Leverage Ratio Standards for U.S. Global Systemically
Important Bank Holding Companies and Their Subsidiary Depository
Institutions; Total Loss-Absorbing Capacity and Long-Term Debt
Requirements for U.S. Global Systemically Important Bank Holding
Companies
AGENCY: Office of the Comptroller of the Currency, Treasury; the Board
of Governors of the Federal Reserve System; and the Federal Deposit
Insurance Corporation.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), and Federal Deposit
Insurance Corporation (FDIC) are adopting a final rule to modify the
enhanced supplementary leverage ratio standards applicable to U.S. bank
holding companies identified as global systemically important bank
holding companies (GSIBs), their subsidiary depository institutions
that are Board- or FDIC-regulated, and national banks and Federal
savings associations that are subsidiaries of a U.S. top-tier bank
holding company with total consolidated assets of more than $700
billion or assets under custody of more than $10 trillion (together
with Board- and FDIC-regulated subsidiary depository institutions of
GSIBs, covered depository institutions). These modifications are
intended to help ensure that the enhanced supplementary leverage ratio
standards serve as a backstop to risk-based capital requirements rather
than a frequently binding constraint, thus reducing potential
disincentives for GSIBs and covered depository institutions to
participate in low-risk, low-return activities. The Board is also
finalizing conforming amendments to its total loss-absorbing capacity
and long-term debt requirements. In addition, the Board is making
conforming amendments to relevant regulatory reporting forms, and the
Board and FDIC are making final certain technical corrections to the
capital rule and the prompt corrective action framework. Banking
organizations subject to the final rule may elect to early adopt the
final rule as of January 1, 2026.
DATES: The final rule is effective April 1, 2026.
FOR FURTHER INFORMATION CONTACT:
OCC: Venus Fan, Risk Expert, Benjamin Pegg, Technical Expert,
Capital Policy, (202) 649-6370; Carl Kaminski, Assistant Director, Ron
Shimabukuro, Senior Counsel, Scott Burnett, Counsel, Chief Counsel's
Office, (202) 649-5490, Office of the Comptroller of the Currency, 400
7th Street SW, Washington, DC 20219. If you are deaf, hard of hearing,
or have a speech disability, please dial 7-1-1 to access
telecommunications relay services.
Board: Juan Climent, Deputy Associate Director, (202) 872-7526;
Brian Chernoff, Manager, (202) 731-8914; Missaka Nuwan Warusawitharana,
Manager, (202) 452-3461; Akos Horvath, Principal Economist, (202) 452-
3048; Nadya Zeltser, Lead Financial Institution Policy Analyst, (202)
452-3164; Anthony Sarver, Senior Financial Institution Policy Analyst,
(202) 475-6317, Division of Supervision and Regulation; or Jay Schwarz,
Deputy Associate General Counsel, (202) 731-8852; Mark Buresh, Senior
Special Counsel, (202) 499-0261; Ryan Rossner, Counsel, (202) 430-1368;
Isabel Echarte, Senior Attorney, (202) 945-2412, Legal Division, Board
of Governors of the Federal Reserve System, 20th and C Streets NW,
Washington, DC 20551. For the hearing impaired only, Telecommunication
Device for the Deaf (TDD), (202) 263-4869.
FDIC: Benedetto Bosco, Chief, Capital Policy Section; Michael
Maloney, Senior Policy Analyst; Kyle McCormick, Senior Policy Analyst;
Keith Bergstresser, Senior Policy Analyst; Eric Schatten, Senior Policy
Analyst; Soo Jeong Kim, Policy Analyst; Matthew Park, Financial
Analyst; Capital Markets and Accounting Policy Branch, Division of Risk
Management Supervision; Catherine Wood, Counsel; Merritt Pardini,
Counsel; Kevin Zhao, Senior Attorney; Nicholas Soyer, Attorney, Legal
Division; <a href="/cdn-cgi/l/email-protection#86f4e3e1f3eae7f2e9f4ffe5e7f6eff2e7eac6e0e2efe5a8e1e9f0"><span class="__cf_email__" data-cfemail="c2b0a7a5b7aea3b6adb0bba1a3b2abb6a3ae82a4a6aba1eca5adb4">[email protected]</span></a>, (202) 898-6888; Federal Deposit
Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Overview of Leverage Capital Requirements for Large Banking
Organizations
B. Objective of Rulemaking
C. Overview of the Proposed Rule and Summary of Comments
D. Overview of the Final Rule
II. Final Rule
A. Changes to the Enhanced Supplementary Leverage Ratio
Standards
1. Proposed Calibration and Comments Received
2. Calibration of the Holding Company Standard
3. Calibration of the Depository Institution Standard
4. Modification to the Form of the Depository Institution
Standard
B. Amendments to Total Loss-Absorbing Capacity and Long-Term
Debt Requirements
C. Applicability Thresholds of the eSLR Standard for OCC-
Supervised Institutions
D. Comments on Other Potential Modifications to the
Supplementary Leverage Ratio Requirement and Other Elements of the
Agencies' Regulatory Framework
E. Technical Corrections
III. Effective Date
IV. Economic Analysis
A. Introduction
B. Baseline
1. Role of Banking Organizations as Investors in U.S. Treasury
Securities
2. Treasury Securities Held by Banking Organizations Subject to
Category I to III Standards
C. Policy Change
D. Reasonable Alternatives
E. Changes in the Supplementary Leverage Ratio and Tier 1
Capital Requirements
F. Benefits
G. Costs
H. Additional Comments on the Economic Analysis
1. Requests To Consider Potential Future Developments
2. Requests To Consider Potential Interaction Effects
3. Requests To Consider Further Benefits and Costs
I. Analysis of TLAC and Long-Term Debt Requirement Changes
1. Baseline
2. Changes in Requirements
3. Anticipated Economic Effects
J. Conclusion
K. Appendix
1. Estimating the Available Capacity of Holding Companies for
Additional Reserves and U.S. Treasury Securities Held as Investment
Securities at Depository Institution Subsidiaries
[[Page 55249]]
2. Estimating the Available Capacity of Holding Companies for
Additional U.S. Treasury Securities Held at Broker-Dealer
Subsidiaries, Assuming Perfect Hedging
V. Administrative Law Matters
A. Paperwork Reduction Act
B. Regulatory Flexibility Act Analysis
C. Plain Language
D. Riegle Community Development and Regulatory Improvement Act
of 1994
E. Executive Orders 12866, 13563, and 14192
F. OCC Unfunded Mandates Reform Act of 1995
G. Congressional Review Act
I. Introduction
On July 10, 2025, the Office of the Comptroller of the Currency
(OCC), Board of Governors of the Federal Reserve System (Board), and
Federal Deposit Insurance Corporation (FDIC) (collectively, the
agencies) published in the Federal Register a notice of proposed
rulemaking (the proposal) \1\ that would modify the enhanced
supplementary leverage ratio (eSLR) standards that apply to U.S. bank
holding companies identified as global systemically important bank
holding companies (GSIBs) \2\ and their subsidiary depository
institutions (covered depository institutions).\3\ Following review of
the comments received on the proposal, the agencies are finalizing the
proposed changes, with certain adjustments discussed below.
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\1\ See ``Regulatory Capital Rule: Modifications to the Enhanced
Supplementary Leverage Ratio Standards for U.S. Global Systemically
Important Bank Holding Companies and Their Subsidiary Depository
Institutions; Total Loss-Absorbing Capacity and Long-Term Debt
Requirements for U.S. Global Systemically Important Bank Holding
Companies,'' 90 FR 30780 (July 10, 2025).
\2\ See 12 CFR part 217, subpart H (GSIB surcharge framework). A
bank holding company subject to the GSIB surcharge framework must
determine whether it is a GSIB by applying a multifactor methodology
based on size, interconnectedness, substitutability, complexity, and
cross-jurisdictional activity. See 12 CFR 217.402.
\3\ This SUPPLEMENTARY INFORMATION uses the term ``covered
depository institutions'' to refer to depository institutions that
are subject to the eSLR standard under the current rule or final
rule, as applicable. Under the current rule, the eSLR standard is
made applicable to depository institutions under the prompt
corrective action framework and therefore applies only to depository
institutions the deposits of which are federally insured. The final
rule changes the form of the eSLR standard applicable to depository
institutions, as discussed in greater detail in section II.A.4 of
this SUPPLEMENTARY INFORMATION, and as a result of this change,
certain national bank subsidiaries, specifically, uninsured national
banks chartered pursuant to 12 U.S.C. 27(a), are subject to the eSLR
standard under the final rule. This change in scope is a result of
the prompt corrective action framework's applicability to insured
depository institutions and the capital rule's applicability to
certain uninsured depository institutions.
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A. Overview of Leverage Capital Requirements for Large Banking
Organizations
Congress has authorized the agencies to establish leverage capital
requirements and standards for banking organizations subject to this
final rule. Section 165 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Dodd-Frank Act),\4\ as amended by section 401
of the Economic Growth, Regulatory Relief, and Consumer Protection
Act,\5\ requires the Board to establish leverage limits for bank
holding companies with $250 billion or more in total consolidated
assets.\6\ The prompt corrective action framework in section 38 of the
Federal Deposit Insurance Act (FDI Act) requires the agencies to
prescribe capital standards for insured depository institutions that
include a leverage limit and provides that the agencies may establish
any additional relevant capital measures to carry out the purpose of
that section.\7\ Various statutory authorities provide the agencies
with broad discretionary authority to set capital requirements and
standards for banking organizations supervised by the agencies,
including national banking associations, state-chartered banks, savings
associations, and depository institution holding companies.\8\
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\4\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\5\ Economic Growth, Regulatory Relief, and Consumer Protection
Act, Public Law 115-174, 132 Stat. 1296 (2018).
\6\ See 12 U.S.C. 5365(a)(1), (b)(1)(A)(i). Section 165 of the
Dodd-Frank Act also provides that the Board may apply any prudential
standard established under section 165 to any bank holding company
with $100 billion or more in total consolidated assets to which the
prudential standard does not otherwise apply, under certain
circumstances. 12 U.S.C. 5365(a)(2)(C). Section 165, in relevant
part, also applies to foreign banks or companies that are treated as
a bank holding company for purposes of the Bank Holding Company Act.
See 12 U.S.C. 3106(a), 5311(a)(1). See also section 401(g) of the
Economic Growth, Regulatory Relief, and Consumer Protection Act
(regarding the Board's authority to establish enhanced prudential
standards for foreign banking organizations with total consolidated
assets of $100 billion or more). 12 U.S.C. 5365 note.
\7\ See 12 U.S.C. 1831o(c)(1)(A), (c)(1)(B)(i).
\8\ See 12 U.S.C. 93a (national banking associations); 12 U.S.C.
248(i), 324, 327, 329 (state member banks); 12 U.S.C. 1463 (savings
associations); 12 U.S.C. 1467a(g)(1) (savings and loan holding
companies); 12 U.S.C. 1844(b) (bank holding companies); 12 U.S.C.
3106 (certain U.S. operations of foreign banking organizations); 12
U.S.C. 3902(1)-(2), 3907(a), 3909(a), (c)(1)-(2) (depository
institutions; affiliates of depository institutions, including
holding companies; and certain U.S. operations of foreign banking
organizations); 12 U.S.C. 5371 (insured depository institutions,
depository institution holding companies, and nonbank financial
companies supervised by the Board).
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In 2013, the agencies adopted a revised regulatory capital rule to
address weaknesses that became apparent during the financial crisis of
2007-09,\9\ which includes two leverage-based requirements for large
banking organizations.\10\ The tier 1 leverage ratio, measured as the
ratio of a banking organization's tier 1 capital to average total
consolidated assets, applies to all banking organizations subject to
the capital rule. Under this requirement, a banking organization is
required to maintain a minimum leverage ratio of at least four percent;
moreover, an insured depository institution is required to maintain a
leverage ratio of at least five percent to be considered ``well
capitalized'' under the prompt corrective action framework.\11\ The
supplementary leverage ratio, measured as the ratio of a banking
organization's tier 1 capital to its total leverage exposure, applies
only to banking organizations subject to Category I-III capital
standards.\12\ Each of these
[[Page 55250]]
banking organizations must maintain a supplementary leverage ratio of
at least three percent. Total leverage exposure includes certain off-
balance sheet exposures in addition to all on-balance sheet assets.\13\
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\9\ The Board and the OCC issued a joint final rule on October
11, 2013 (78 FR 62018), and the FDIC issued a substantially
identical interim final rule on September 10, 2013 (78 FR 55340).
The FDIC adopted the interim final rule as a final rule with no
substantive changes on April 14, 2014 (79 FR 20754). See 12 CFR part
3 (OCC); 12 CFR part 217 (Board); 12 CFR part 324 (FDIC).
\10\ See 12 CFR 3.10(a) (OCC); 12 CFR 217.10(a) (Board); 12 CFR
324.10(a) (FDIC). The term ``banking organizations,'' as used in
this SUPPLEMENTARY INFORMATION, includes national banks; state
member banks; state nonmember banks; Federal savings associations;
state savings associations; top-tier bank holding companies
domiciled in the United States not subject to the Board's Small Bank
Holding Company and Savings and Loan Holding Company Policy
Statement (12 CFR part 225 app'x C); U.S. intermediate holding
companies of foreign banking organizations; and top-tier savings and
loan holding companies domiciled in the United States, except for
certain savings and loan holding companies that are significantly
engaged in commercial activities and certain savings and loan
holding companies that are subject to the Small Bank Holding Company
and Savings and Loan Holding Company Policy Statement.
\11\ See 12 CFR 3.10(a)(1)(iv), 6.4(b)(1)(i)(D) (OCC); 12 CFR
208.43(b)(1)(i)(D), 217.10(a)(1)(iv) (Board); 12 CFR
324.10(a)(1)(iv), 324.403(b)(1)(i)(D) (FDIC); see also 12 CFR 3.12
(OCC); 12 CFR 217.12 (Board); 12 CFR 324.12 (FDIC).
\12\ In 2019, the agencies adopted rules establishing four
categories of capital standards for U.S. banking organizations with
$100 billion or more in total consolidated assets and foreign
banking organizations with $100 billion or more in combined U.S.
assets. Under this framework, Category I standards apply to GSIBs
and their depository institution subsidiaries. Category II standards
apply to banking organizations with at least $700 billion in total
consolidated assets or at least $75 billion in cross-jurisdictional
activity and their depository institution subsidiaries. Category III
standards apply to banking organizations with total consolidated
assets of at least $250 billion or at least $75 billion in weighted
short-term wholesale funding, nonbank assets, or off-balance sheet
exposure and their depository institution subsidiaries. Category IV
standards apply to banking organizations with total consolidated
assets of at least $100 billion that do not meet the thresholds for
a higher category and their depository institution subsidiaries. See
12 CFR 3.2 (OCC); 12 CFR 238.10, 252.5, (Board); 12 CFR 324.2
(FDIC); ``Prudential Standards for Large Bank Holding Companies,
Savings and Loan Holding Companies, and Foreign Banking
Organizations,'' 84 FR 59032 (Nov. 1, 2019); ``Changes to
Applicability Thresholds for Regulatory Capital and Liquidity
Requirements,'' 84 FR 59230 (Nov. 1, 2019).
\13\ See 12 CFR 3.10(c) (OCC); 12 CFR 217.10(c) (Board); 12 CFR
324.10(c) (FDIC).
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In 2014, the agencies adopted a final rule that required GSIBs and
covered depository institutions to meet enhanced supplementary leverage
ratio standards.\14\ Specifically, this framework requires each GSIB to
maintain a supplementary leverage ratio of at least three percent plus
a leverage buffer greater than two percent to avoid limitations on the
GSIB's capital distributions and certain discretionary bonus
payments.\15\ In addition, any insured depository institution
subsidiary of a GSIB must maintain a supplementary leverage ratio of at
least six percent to be ``well capitalized'' under the prompt
corrective action framework of the Board, OCC, or FDIC, as
applicable.\16\
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\14\ See ``Regulatory Capital Rules: Regulatory Capital,
Enhanced Supplementary Leverage Ratio Standards for Certain Bank
Holding Companies and Their Subsidiary Insured Depository
Institutions,'' 79 FR 24528 (May 1, 2014). The eSLR standards were
originally applicable to bank holding companies with more than $700
billion in total consolidated assets or $10 trillion in assets under
custody and their subsidiary depository institutions. The Board
revised the applicability of the eSLR standards in its rules to
apply to GSIBs and their subsidiary depository institutions in
connection with the GSIB surcharge rule. See 80 FR 49082 (Aug. 14,
2015). The FDIC made an equivalent change in 2020, while the OCC
retained the original applicability thresholds. See 85 FR 74257
(Nov. 20, 2020).
\15\ The leverage buffer requirement follows the same general
mechanics and structure as the capital conservation buffer
requirement that applies to all banking organizations subject to the
capital rule, though the capital conservation buffer requirement is
calibrated differently. Specifically, a GSIB that maintains a
leverage buffer of more than two percent of its total leverage
exposure would not be subject to limitations on its distributions
and certain discretionary bonus payments. A GSIB that maintains a
leverage buffer of two percent or less would be subject to
increasingly strict limitations on such payouts. See 12 CFR 217.11.
\16\ See 12 CFR 6.4(b)(1)(i)(D)(2) (OCC); 12 CFR
208.43(b)(1)(i)(D)(2) (Board); 12 CFR 324.403(b)(1)(ii) (FDIC).
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B. Objective of Rulemaking
Within the regulatory capital framework, leverage and risk-based
capital requirements play complementary roles, with each addressing
potential risks not addressed by the other.\17\ Risk-based capital
requirements that are commensurate with the risk profile of a banking
organization's exposures help to encourage prudent behavior by
requiring a banking organization to maintain higher levels of capital
for activities and exposures that present greater risk. Historical
experience, however, has demonstrated that risk-based measures alone
may be insufficient to support loss-absorbing capacity at banking
organizations through economic cycles. Leverage capital requirements,
which do not take into account the risks of a banking organization's
exposures, can help to mitigate underestimations of those risks by both
banking organizations and risk-based capital requirements.\18\
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\17\ The regulatory capital framework is designed to help ensure
that banking organizations maintain sufficient resources to absorb
losses and prevent the distress or failure of a banking
organization. See 12 CFR 3.1 (OCC); 12 CFR 217.1 (Board); 12 CFR
324.1 (FDIC). The regulatory capital framework consists of both
risk-based and leverage capital requirements. Risk-based capital
requirements establish a minimum amount of regulatory capital a
banking organization must maintain based on the risk profile of its
on- and off-balance sheet exposures, whereas leverage capital
requirements establish minimum risk-insensitive capital
requirements. See 12 CFR 3.10 (OCC); 12 CFR 217.10 (Board); 12 CFR
324.10 (FDIC).
\18\ Risk-based and leverage capital measures can also contain
complementary information about a banking organization's condition.
See, e.g., Arturo Estrella, Sangkyun Park, and Stavros Peristiani,
``Capital Ratios as Predictors of Bank Failure,'' Federal Reserve
Bank of New York Economic Policy Review (2000).
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As discussed in the proposal, an appropriately calibrated leverage
capital requirement sets a simple and transparent limit on a banking
organization's leverage. In addition, leverage capital requirements can
be useful to address cases where the level of risk at a particular
banking organization or across the financial system is difficult to
measure. However, when a leverage capital requirement is calibrated too
high and becomes a banking organization's regularly binding capital
requirement, it can create incentives for the banking organization to
engage in higher-risk activities in search of higher returns and to
reduce participation in lower-risk, lower-return activities. A banking
organization that has a leverage capital requirement as its binding
capital requirement can, on the margin, replace a lower-risk asset with
a higher-risk asset without a corresponding increase in its overall
regulatory capital requirement.\19\
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\19\ See section IV of this SUPPLEMENTARY INFORMATION for
further discussion of the incentive effects of a binding leverage
capital requirement.
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The proposal discussed, as an example, concerns that a regularly
binding leverage capital requirement could disincentivize large banking
organizations from intermediating in the U.S. Treasury market. Market
participants have suggested that such disincentives could, under
certain circumstances, impede the orderly functioning of the U.S.
Treasury market and of U.S. and global financial markets more
broadly.\20\ As discussed further below, some commenters on the
proposal echoed this concern. The U.S. Treasury market is one of the
deepest and most liquid markets in the world and serves as a source of
safe and liquid assets that are used for a variety of purposes in the
financial markets.\21\ Confidence in the efficient functioning of the
U.S. Treasury market, including during times of stress, is critical to
the stability of the domestic and global banking and financial systems.
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\20\ See, e.g., Zhiguo He, Stefan Nagel, and Zhaogang Song,
Treasury Inconvenience Yields During the COVID-19 Crisis. 143 J.
Fin. Econ. 57-79 (2022).
\21\ See U.S. Department of the Treasury, Board of Governors of
the Federal Reserve System, Federal Reserve Bank of New York, U.S.
Securities and Exchange Commission, and U.S. Commodity Futures
Trading Commission, Enhancing the Resilience of the U.S. Treasury
Market: 2023 Staff Progress Report (Nov. 6, 2023).
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As discussed in the proposal, appropriate calibration of regulatory
capital requirements involves a balancing of considerations. A banking
organization should maintain sufficient capital to absorb losses and
continue to serve as a financial intermediary over a range of
conditions. In addition, it is important that the capital framework not
create potential disincentives for a banking organization to prudently
engage in low-risk activities or important market functions. The
agencies regularly review the regulatory capital framework to help
ensure requirements are appropriate in view of evolving risks and
financial innovation and that the framework is functioning as intended.
In reviewing the eSLR standards, the agencies considered factors such
as alignment of requirements with risks; incentives for banking
organizations to perform critical financial services over a range of
economic conditions; and ways to enhance the efficiency of the
framework.
[[Page 55251]]
C. Overview of the Proposed Rule and Summary of Comments
In light of the agencies' review of the eSLR standards and
experience gained since their initial adoption, on July 10, 2025, the
agencies published the proposal. The proposal would recalibrate the
eSLR standards to reduce the likelihood and frequency of the eSLR
standards becoming a binding capital requirement for GSIBs and covered
depository institutions. The proposed recalibration of the eSLR
standards sought to reduce disincentives for banking organizations to
engage in lower-risk, lower-return activities, such as U.S. Treasury
market intermediation, and reduce the need for temporary adjustments in
the event of severe market stress, as occurred in 2020.\22\
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\22\ During the March 2020 economic turmoil, U.S. Treasury
market liquidity rapidly deteriorated as a result of supply-demand
imbalance, while primary dealers were reluctant to increase their
holdings of U.S. Treasury securities, prompting market participants
and regulators to consider enhancements to the resilience of the
U.S. Treasury market. On April 1, 2020, the Board provided holding
companies a temporary exclusion for U.S. Treasury securities and
deposits at the Federal Reserve from the denominator of the
supplementary leverage ratio through March 31, 2021. On May 15,
2020, the Board, OCC, and FDIC extended comparable treatment to
depository institutions, which could elect this exclusion subject to
capital action preapproval. Both interim final rules expired as
scheduled on March 31, 2021. See ``Temporary Exclusion of U.S.
Treasury Securities and Deposits at Federal Reserve Banks from the
Supplementary Leverage Ratio,'' 85 FR 20578 (April 14, 2020) and
``Regulatory Capital Rule: Temporary Exclusion of U.S. Treasury
Securities and Deposits at Federal Reserve Banks from the
Supplementary Leverage Ratio for Depository Institutions,'' 85 FR
32980 (June 1, 2020).
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Under the proposal, the Board proposed to recalibrate the eSLR
buffer standard for GSIBs to equal 50 percent of a GSIB's method 1
surcharge calculated under the Board's GSIB surcharge framework, rather
than the current leverage buffer standard of two percent.\23\
Similarly, the agencies proposed to modify the eSLR standard for
covered depository institutions from the current six percent ``well
capitalized'' threshold under the prompt corrective action framework to
an eSLR buffer standard equal to 50 percent of the parent GSIB's method
1 surcharge calculation, above the minimum supplementary leverage ratio
requirement of three percent. The proposal also included conforming
amendments to the leverage-based components of the Board's total loss-
absorbing capacity and long-term debt requirements, and the OCC
proposed changes to the criteria it uses to identify which national
banks and Federal savings associations are subject to the eSLR
standards. In addition, the Board and FDIC proposed to make certain
technical corrections to the capital rule and prompt corrective action
framework, and the Board proposed to make conforming amendments to
relevant regulatory reporting forms.
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\23\ The Board's capital rule requires a GSIB to calculate its
GSIB risk-based surcharge in two ways, known as method 1 and method
2, and apply the higher of the two results. See 12 CFR 217.403(a).
The first method (method 1) is based on five categories that are
correlated with systemic importance--size, interconnectedness,
cross-jurisdictional activity, substitutability, and complexity. The
second method (method 2) uses similar inputs but replaces
substitutability with the use of short-term wholesale funding and is
calibrated in a manner that generally will result in surcharge
levels for GSIBs that are higher than those calculated under method
1.
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The proposal also requested comment on potential additional or
alternative approaches that could help to achieve the objectives of the
proposal, including a potential exclusion of Treasury securities held
for trading at broker-dealer subsidiaries (and foreign equivalents
thereof) of depository institution holding companies from the
denominator of the supplementary leverage ratio (the narrow exclusion
approach).
The agencies received approximately 40 comments on the proposal
from a range of parties, including policy advocacy groups, banking
organizations, banking and financial industry trade associations, other
financial market participants, academics, members of Congress, research
organizations, and individuals.
Some commenters, including nearly all trade associations, large
banking organizations, and other financial market participants, along
with some academics and other individuals, were broadly supportive of
the proposal. These commenters stated that the current eSLR standards
disincentivize banking organizations from participating in a range of
low-risk activities, including U.S. Treasury market intermediation and
holding customer deposits. These commenters stated that the proposed
modifications to the eSLR standards would increase the capacity of
banking organizations to serve their clients and the broader economy
across a range of low-risk activities. Some of these commenters also
stated that the proposed modifications may prove especially beneficial
to U.S. Treasury market intermediation and other low-risk activities
during episodes of financial stress, when, these commenters stated,
supplementary leverage ratio requirements are more likely to become a
binding capital constraint. Some of these commenters urged the agencies
to promptly finalize and implement the proposal.
Other commenters, including advocacy groups, members of Congress, a
trade group for community banking organizations, academics, and
individuals, objected to the proposal. These commenters generally
asserted that the proposal would significantly weaken the existing
capital framework for GSIBs and covered depository institutions and
increase risks to the safety and soundness of banking organizations,
the banking system, and overall financial stability. Some of these
commenters also asserted that the agencies should not adopt the
proposal because, in these commenters' view, the proposed changes would
not aid U.S. Treasury market intermediation. Instead, these commenters
asserted that banking organizations would choose to allocate extra
capital capacity created by the proposal to other higher-risk
activities or to distribute extra capital to shareholders, thereby
putting banking organizations and the Deposit Insurance Fund at greater
risk while not improving Treasury market intermediation. Additionally,
one commenter argued that the proposal would give preferential
treatment to GSIBs relative to other banking organizations and
undermine the competitive position of smaller banking organizations.
The agencies also received comments regarding specific aspects of
the proposal discussed further below.
D. Overview of the Final Rule
The agencies are finalizing the proposal, with some modifications.
The final rule recalibrates the eSLR standard for GSIBs as proposed.
For covered depository institutions, the final rule includes a change
from the proposal based on comments received. Specifically, the final
rule adopts an eSLR buffer standard equal to 50 percent of a covered
depository institution's parent GSIB's method 1 surcharge, capped at 1
percent. The eSLR buffer standard will apply in addition to the three
percent supplementary leverage ratio minimum requirement.
The final rule also implements the proposed changes to the
leverage-based components of the total loss-absorbing capacity and
long-term debt requirements for GSIBs without modification. The final
rule does not adopt the proposed criteria that the OCC would have used
to determine applicability of the eSLR standard for OCC-supervised
institutions. Further, the agencies are not including in the final rule
any additional modifications to the supplementary leverage ratio
[[Page 55252]]
requirement, such as the narrow exclusion approach discussed in the
proposal, or changes to other elements of the agencies' regulatory
framework requested by some commenters. The final rule adopts technical
corrections to the capital rule and changes to the prompt corrective
action framework consistent with the proposal. The final rule includes
an effective date of April 1, 2026, with the optional early adoption of
the final rule's modified eSLR standards beginning January 1, 2026.
This SUPPLEMENTARY INFORMATION also presents the economic analysis of
the final rule's changes and discusses administrative law matters.
II. Final Rule
A. Changes to the Enhanced Supplementary Leverage Ratio Standards
1. Proposed Calibration and Comments Received
The proposal would have recalibrated the eSLR buffer standard for
GSIBs to equal 50 percent of a GSIB's method 1 surcharge calculated
under the Board's GSIB surcharge framework, rather than the current
leverage buffer standard of two percent. Similarly, the proposal would
have modified the eSLR standard for covered depository institutions
from the current six percent ``well capitalized'' threshold under the
prompt corrective action framework to an eSLR buffer standard equal to
50 percent of the parent GSIB's method 1 surcharge calculation.\24\ As
a result, the eSLR standards would have been the same in both form and
calibration at the bank holding company and subsidiary depository
institution levels.
---------------------------------------------------------------------------
\24\ As a result of this change, certain national bank
subsidiaries, specifically, uninsured national banks chartered
pursuant to 12 U.S.C. 27(a), would have become subject to the eSLR
standard. See supra n. 3.
---------------------------------------------------------------------------
The agencies received a number of comments on the proposed
modifications to the eSLR standards. Many commenters strongly supported
recalibrating the eSLR standards to help ensure that this requirement
serves as a backstop to risk-based capital requirements, rather than a
frequently binding constraint. These commenters stated that a regularly
binding leverage ratio requirement disincentivizes banking
organizations from participating in low-risk, low-return activities,
such as intermediation in the U.S. Treasury market, and more broadly
decreases the capacity of banking organizations to perform critically
important functions across a range of low-risk activities, particularly
in periods of stress. Some of these commenters further stated that
recalibrating the current eSLR buffer of two percent to a buffer that
is equal to 50 percent of a GSIB's method 1 surcharge would help ensure
that the eSLR standards serve as a backstop to risk-based capital
requirements and increase the capacity of GSIBs to engage in low-risk
activities, including U.S. Treasury market intermediation. Some of
these commenters also asserted that GSIBs would continue to have strong
levels of capital, while being more capable of effectively allocating
capital within their organizations.
Conversely, many commenters opposed the proposed modifications to
the calibration of the eSLR standards, with some commenters stating the
agencies should withdraw the proposal. Some of these commenters argued
that the proposal did not provide sufficient justification or rationale
for the recalibration. Some commenters also asserted that the proposed
changes would reduce the eSLR standards by too much relative to risk-
based capital requirements, such that supplementary leverage ratio
requirements would not serve as a meaningful backstop to risk-based
requirements, or disagreed with the idea that the eSLR standards should
serve as a backstop rather than a regularly binding constraint. In
these commenters' views, the eSLR standards should serve a more primary
or equal role relative to risk-based capital requirements, in order to
better address risks not well addressed by risk-based capital
requirements. For example, some commenters asserted that the risk-based
capital framework has many shortcomings and does not sufficiently
capture credit and interest rate risks of U.S. Treasury securities or
risks related to off-balance sheet exposures. Therefore, in these
commenters' view, the supplementary leverage ratio requirement serves
as a simple and important requirement to help mitigate such risks,
which, in turn, promotes the safety and soundness of the banking system
and the financial system more broadly. Additionally, one commenter
asserted that leverage capital requirements must be binding in some
cases to ensure such requirements are effective.
Some commenters asserted that declines in capital requirements
resulting from the proposed changes to the eSLR standards would
undermine banking organizations' ability to lend during economic
downturns or periods of financial stress, particularly if the agencies
also reduce risk-based capital requirements in the future. Some
commenters also stated that reductions in capital at GSIBs as a result
of the proposal would increase the risks of bank failures and financial
crises. Several commenters expressed concerns that the proposal would
advantage the largest banking organizations over community and regional
banking organizations.
Some commenters suggested alternative approaches to the proposal
that the agencies should consider that, in these commenters' views,
would help ensure the safety and soundness of banking organizations,
alter the incentives arising from capital requirements, or achieve
other objectives of the proposal. One commenter suggested that agencies
should increase risk-based capital requirements to address the
incentive concerns, rather than lowering the eSLR standards, and some
commenters stated that the agencies should generally increase capital
requirements, including leverage capital requirements. Some commenters
suggested that the agencies could make the eSLR buffer standards more
countercyclical, such as by adopting a mechanism that would temporarily
lower the eSLR buffer standards in periods of stress.
Several commenters supported the proposal because, in these
commenters' view, it would reduce regulatory disincentives for GSIBs to
participate in low-risk, low-return businesses, such as U.S. Treasury
market intermediation, and welcomed the agencies' proposed
modifications to the eSLR standards as a change that would reduce costs
of intermediating in the U.S. Treasury market. These commenters
expressed concerns with the current bindingness of the eSLR standards
and its effects on U.S. Treasury market intermediation, other low-risk
activities, and the broader financial system. Commenters supportive of
the proposal stated that a binding supplementary leverage ratio
requirement has an adverse impact on intermediation in the U.S.
Treasury market by constraining the activities of GSIBs' broker-
dealers, particularly during periods of stress, when GSIBs may face
additional balance sheet constraints due to such factors as deposit
inflows, increased demand for Treasury market intermediation, and
changes in the aggregate level of deposits at Federal Reserve
Banks.\25\ Some commenters stated that lower-risk assets have increased
proportionally with banking organizations' balance sheets over the past
decade, driven in
[[Page 55253]]
part by increased overall levels of Treasury security issuance and
deposits at Federal Reserve Banks; these commenters stated these
developments have caused the supplementary leverage ratio requirement
to become more binding over time. One commenter asserted that, when the
agencies originally calibrated the eSLR standards, the agencies
underestimated growth in the supply of these assets, resulting in
supplementary leverage ratio requirements becoming regularly binding in
a manner that was not intended.
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\25\ These commenters cited research in support of their
statements on the adverse incentives of a regularly binding
supplementary leverage ratio requirement on U.S. Treasury markets
functioning, discussed in section IV.F of this SUPPLEMENTARY
INFORMATION.
---------------------------------------------------------------------------
In contrast, some commenters asserted that the agencies should not
adopt the proposed changes because, in the view of these commenters,
there is not sufficient evidence that the supplementary leverage ratio
is a binding requirement that constrains GSIBs' U.S. Treasury market
intermediation or that the proposal would support U.S. Treasury market
intermediation. These commenters asserted that banking organizations
have sufficient capacity under the current supplementary leverage ratio
requirement to engage in Treasury market intermediation and can, in
periods of stress, use their buffers to absorb any increased demand for
Treasury market intermediation. One commenter stated that insured
depository institutions and primary dealers have more than doubled
their exposure to U.S. Treasury securities relative to other assets in
the last decade, which, in the view of this commenter, indicates that
the proposed changes to the eSLR standards are not necessary.
Some commenters asserted that the agencies should not adopt the
proposed changes because other measures could help promote Treasury
market intermediation, such as increased central clearing of U.S.
Treasury security-related transactions, improvements to data quality,
enhancements to market transparency, and examination of the effects of
risk management practices. Some commenters also asserted that increased
central clearing of U.S. Treasury security-related transactions could
provide additional balance sheet capacity for banking organizations due
to netting benefits, which some of these commenters asserted would
reduce the need for the proposal, whereas another commenter saw the
proposal as beneficial to Treasury market intermediation
notwithstanding developments in central clearing. Several commenters
asserted that large holdings of U.S. Treasury securities could pose
risks to banking organizations because the risks of these assets may
not be sufficiently captured by risk-based capital requirements.
Another commenter suggested that recent issues in U.S. Treasury markets
relate primarily to the sustainability of fiscal deficits rather than
the capital framework for banking organizations. Certain commenters
expressed concern that the objective of the proposal was to reduce
government borrowing costs, rather than the objectives stated in the
proposal. Some commenters expressed concerns that banking organizations
would elect not to use available capital to facilitate Treasury market
intermediation, and some asserted that banking organizations would
instead increase capital distributions to shareholders or engage in
riskier activities, such as lending to hedge funds.
The agencies also received comments on the proposed use of the
Board's GSIB surcharge framework to determine eSLR buffer standards.
Several commenters supported using the GSIB surcharge framework to
calibrate the eSLR buffer standard and more specifically supported the
use of a GSIB's method 1 surcharge. These commenters stated that this
calibration methodology would appropriately achieve the proposal's
objective to help ensure that the supplementary leverage ratio
requirement serves as a backstop to risk-based capital requirements,
rather than a binding constraint. Some commenters also noted the
benefit of consistency in the eSLR standards for GSIBs with the
leverage ratio framework published by the Basel Committee on Banking
Supervision (Basel Committee) and with the implementation of these
requirements in other jurisdictions.\26\
---------------------------------------------------------------------------
\26\ See Basel Committee, ``Basel III: Finalising post-crisis
reforms'' (Dec. 2017), available at: <a href="https://www.bis.org/bcbs/publ/d424.pdf">https://www.bis.org/bcbs/publ/d424.pdf</a>; Basel Committee, ``Basel III leverage ratio framework and
disclosure requirements'' (Jan. 2014) available at <a href="http://www.bis.org/publ/bcbs270.htm">http://www.bis.org/publ/bcbs270.htm</a>. The Basel Committee is an
international coordinating committee of banking supervisory
authorities, established by the central bank governors of the G-10
countries in 1975, and comprised of representatives from supervisory
authorities of 28 jurisdictions. More information regarding the
Basel Committee and its membership is available at <a href="https://www.bis.org/bcbs/about.htm">https://www.bis.org/bcbs/about.htm</a>. Documents issued by the Basel Committee
are available through the Bank for International Settlements website
at <a href="https://www.bis.org">https://www.bis.org</a>.
---------------------------------------------------------------------------
Several commenters supportive of the proposed recalibration also
recommended capping the eSLR buffer at the current level of two percent
to help ensure that the supplementary leverage ratio requirement
continues to appropriately function as a backstop to risk-based capital
requirements should a banking organization's method 1 surcharge
increase in the future. Specifically, these commenters asserted that
the proposed approach might result in an eSLR buffer standard that, in
the view of these commenters, could be inappropriately high, which
these commenters stated would be contrary to the intent of the proposed
recalibration. According to these commenters, capping the eSLR buffer
standard at a fixed amount, such as two percent, would mitigate the
potential for constraints in U.S. Treasury market and other
intermediation activities if increases over time in the method 1
surcharge calculation flow through to the eSLR calibration. Conversely,
one commenter asserted that it is important that GSIBs with surcharges
above four percent would be subject to the eSLR buffers above two
percent to reflect their higher risk profiles.
Other commenters opposed the proposed use of the Board's GSIB
surcharge framework to calculate the eSLR buffer standards. Some of
these commenters asserted that using the GSIB surcharge framework to
establish a firm's eSLR buffer standard would undermine key features of
the eSLR standard as a leverage requirement, such as its relative
simplicity and its insensitivity to risk. In these commenters' view,
leverage capital requirements are designed to operate independently of
risk assessments and therefore integrating the risk-based GSIB
surcharge methodology into a risk-insensitive leverage capital
requirement would not be prudent. Some commenters also asserted that
the proposed calibration based on a GSIB's method 1 surcharge would
introduce unnecessary complexity because this approach would differ
from the Board's GSIB risk-based surcharge framework, which uses the
higher of a GSIB's method 1 or method 2 surcharges. One commenter
asserted that use of a GSIB's method 1 surcharge would not be
appropriate because potential variations in the method 1 surcharge
could be driven by changes to aggregate global indicator amounts used
in the method 1 calculation, which incorporate data provided to the
Basel Committee by foreign banking organizations. This commenter stated
that the relevance of certain foreign banking organization indicators
in measuring the riskiness of U.S. banking organizations is unclear.
One commenter asserted that setting the eSLR buffer annually based
on a GSIB's most recent GSIB surcharge could introduce unnecessary
volatility. This commenter suggested calculating simple averages for
the last two years and phasing in any change equally over two
consecutive quarters to mitigate any
[[Page 55254]]
volatility in the GSIB surcharges. Some commenters suggested
alternative methodologies for the calibration of the eSLR buffer, such
as using the higher of a GSIB's method 1 or method 2 surcharge, only
using a method 2 surcharge with a multiplier, developing a new
methodology, or establishing a one percent minimum floor to ensure that
the eSLR buffer would not fall below one percent of total leverage
exposure. One commenter suggested that the agencies should apply a
distinct calibration to GSIBs that are heavily involved in custody
activities, to reflect the exclusions applicable for deposits at the
Federal Reserve and certain other central banks that are linked to
fiduciary or custodial and safekeeping accounts from the denominator of
the supplementary leverage ratio.\27\
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\27\ These exclusions were added to the capital rule to
implement section 402 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act. See Public Law 115-174, at section
402(b)(2)(B), 132 Stat. 1359 (codified as amended at 12 U.S.C. 1831o
note).
---------------------------------------------------------------------------
Some commenters raised concerns regarding the agencies' statutory
authority to implement the proposed changes, including assertions that
the agencies were not permitted to consider burden, efficiency, or U.S.
Treasury market functioning when establishing capital requirements. In
addition, another commenter asserted that the proposed changes would
result in the eSLR standards becoming less stringent than requirements
applicable to banking organizations with a lesser systemic risk
profile, which the commenter asserted was not permitted under
provisions of the Dodd-Frank Act. Another commenter asserted that
provisions of the Dodd-Frank Act and FDI Act require the agencies to
ensure that their risk-based and leverage capital requirements are both
binding and effective.
As discussed in section I.A of this SUPPLEMENTARY INFORMATION,
Congress has granted the agencies with authority to establish leverage
capital requirements and standards for banking organizations subject to
this final rule. The agencies regularly review and may implement
changes to improve the effectiveness of their regulations, including to
minimize unintended, adverse consequences or interactions, while
continuing to achieve the intended effects. The agencies note that the
eSLR standards exceed leverage capital requirements applicable to less
systemically important firms, as the eSLR buffer standard is additive
to the supplementary leverage ratio minimum requirement of three
percent that also applies to banking organizations subject to Category
II and III capital standards. Moreover, GSIBs and covered depository
institutions will remain subject to tier 1 leverage ratio requirements.
Both risk-based and leverage requirements will continue to have an
impact on decision making. For example, there are business models and
market conditions that could result in the eSLR standards and
supplementary leverage ratio, along with the tier 1 leverage ratio,
becoming binding constraints for certain banking organizations. Indeed,
as discussed in section IV.E of this SUPPLEMENTARY INFORMATION, the
agencies estimate that some covered depository institution subsidiaries
are still expected to have higher supplementary leverage ratio
requirements than risk-based requirements.
In addition to the comments discussed above, the agencies also
received comments that specifically discuss proposed changes to covered
depository institutions, as discussed in more details in section II.A.3
of this SUPPLEMENTARY INFORMATION.
As discussed below, the agencies are finalizing the proposal with
some modifications to the calibration of the eSLR standards for covered
depository institutions.
2. Calibration of the Holding Company Standard
After reviewing the comments, the Board is adopting as final the
recalibration of the eSLR buffer standard for GSIBs to equal 50 percent
of a GSIB's method 1 surcharge. This recalibration is important to help
mitigate potential disincentives for GSIBs to engage in low-risk, low-
return, balance-sheet-intensive activities, such as intermediation by
GSIBs' broker-dealer subsidiaries in markets for Treasury securities,
and from holding low-risk assets in general. As many commenters
observed, a regularly binding supplementary leverage ratio requirement
can create disincentives for banking organizations to engage in low-
risk, low-return activities and may contribute to increased volatility
and reduced liquidity in U.S. Treasury markets during periods of
stress. GSIBs play a key role in supporting market liquidity and
providing financing in Treasury markets, as discussed in section IV of
this SUPPLEMENTARY INFORMATION.\28\
---------------------------------------------------------------------------
\28\ Section IV.F of this SUPPLEMENTARY INFORMATION discusses
the expected impact of the final rule on U.S. Treasury market
activities.
---------------------------------------------------------------------------
As noted above, many commenters stated that the agencies should not
change the eSLR standards to create additional demand for U.S. Treasury
securities, or that the agencies should not adopt the proposed changes
to enhance U.S. Treasury market functioning when, in the view of the
commenters, other regulatory changes or measures could directly achieve
such an outcome. While the agencies expect the final rule to reduce
unintended disincentives for GSIBs to intermediate in the U.S. Treasury
market,\29\ the primary purpose of the final rule is not to support
increased U.S. Treasury market issuance or substitute for other
regulatory or private sector efforts that more directly seek to target
U.S. Treasury market structure or functioning, as some commenters
suggested. Rather, the final rule seeks to calibrate the eSLR standards
such that they serve as a backstop to risk-based capital requirements,
rather than a regularly binding capital constraint, to address the
potential negative incentive effects that can occur when a leverage
requirement is too frequently binding or near-binding. Furthermore, and
importantly, while the final rule seeks to reduce regulatory
disincentives for low-risk activities, the final rule does not create
preferences for certain low-risk activities over others.
---------------------------------------------------------------------------
\29\ See Section IV.F of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
As some commenters noted, the use of method 1 to calculate the eSLR
buffer standard for GSIBs would incorporate the use of a risk-based
indicator methodology to determine the calibration of a risk-
insensitive leverage requirement. Such an approach, however, results in
the application of more stringent requirements to banking organizations
that present the greatest systemic risks. It is also consistent with
the methodology used in the Board's existing regulatory framework to
determine whether a bank holding company is a GSIB, and therefore
whether it is subject to the eSLR standards under both the current and
final rule.\30\ The use of a risk-based measure to determine
application of a leverage requirement is also consistent with other
parts of the agencies' regulatory tailoring framework, which, for
example, uses indicators of risk to determine the application of the
supplementary leverage ratio requirement.\31\ Importantly, the GSIB
surcharge is risk-based in the sense that it is based on the risks that
the failure of a systemically important bank
[[Page 55255]]
holding company could present to the stability of the financial system,
which is different from the risk-based capital requirements'
differentiation of exposures by risk presented to the banking
organization by each exposure.\32\ The final rule determines a GSIB's
eSLR buffer standard based on its systemic footprint and therefore
subjects such systemically important banking organizations to more
stringent capital requirements.
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\30\ See 12 CFR 217.402.
\31\ Under the regulatory tailoring framework, banking
organizations subject to Category I-III capital standards are
subject to the supplementary leverage ratio requirement. 12 CFR 3.2,
3.10(c) (OCC); 12 CFR 217.10(c), 252.5 (Board); 12 CFR 324.2,
324.10(c) (FDIC).
\32\ 80 FR 49082, at 49083 (Aug. 14, 2015).
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The final rule's calibration of the eSLR standard based on the GSIB
surcharge framework also helps promote consistency in the eSLR
standards for large, complex, and internationally active banking
organizations across jurisdictions, as it is consistent with the
leverage ratio framework published by the Basel Committee.
International consistency can enhance the resilience of the U.S.
financial system by limiting the potential for a global ``race to the
bottom'' on prudential standards and reduce the likelihood of financial
distress in foreign jurisdictions having negative effects in the United
States.\33\ In addition, international consistency of banking
regulations, in general and where appropriate, can help to reduce
compliance costs and barriers to market entry for banking organizations
that operate across jurisdictions.
---------------------------------------------------------------------------
\33\ For example, the Basel Committee was originally formed
after the failure of Herstatt Bank in Germany in 1974, which
contributed to serious disruptions to foreign currency and banking
markets within and beyond Germany, demonstrating the need for better
coordination among bank regulators in different jurisdictions. See
History of the Basel Committee, available at <a href="https://www.bis.org/bcbs/history.htm">https://www.bis.org/bcbs/history.htm</a>. See also, e.g., 12 U.S.C. 1828 note, 3901, 3907,
3911, and 5373; 22 U.S.C. 9522 note; Federal Deposit Insurance
Corporation Improvement Act of 1991 section 305(b)(2), Public Law
102-242, 105 Stat. 2236, 2355.
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The final rule does not base the calibration of a GSIB's eSLR
buffer standard on the higher of its method 1 or method 2 surcharge as
some commenters advocated. As discussed in the proposal, using a GSIB's
method 1 surcharge produces a generally lower calibration that meets
the objective for leverage capital requirements to act as a backstop to
risk-based capital requirements, and it is consistent with the leverage
ratio framework published by the Basel Committee.
The final rule's calibration of the eSLR standard for GSIBs does
not include a cap, as suggested by some commenters. The Board considers
the final rule's calibration of the eSLR standard to be appropriate, as
it correlates with the systemic footprint of a GSIB at the consolidated
level and achieves the goals of the rule.
The Board does not consider it appropriate to apply, as one
commenter suggested, a different eSLR standard calibration for GSIBs
with significant custodial activity than would apply to other GSIBs.
Under the current rule, uniform calibrations of the eSLR standards
apply to GSIBs and covered depository institutions, respectively. No
adjustment to the calibration of the eSLR standards applies for banking
organizations that are predominantly engaged in custody, safekeeping,
and asset servicing activities (custodial banking organizations), which
are subject to a modified supplementary leverage ratio calculation as
required by section 402 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act. The final rule would not change this aspect of
the current rule.\34\
---------------------------------------------------------------------------
\34\ The cumulative impact of changes to the capital rule to
implement section 402 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act and the final rule are reflected in the
analysis discussed in section IV of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
The Board expects the final rule's recalibration of the eSLR
standard for GSIBs will reduce disincentives for these banking
organizations to participate in low-risk, balance sheet-intensive
activities that are important for the functioning of the banking system
and the financial system more broadly, while generally not materially
changing the amount of capital in the banking system.\35\ However,
because GSIB risk-based capital requirements and buffers fluctuate over
time in response to changes in stress test results and other factors,
the effect of recalibrating the eSLR standard on capital requirements
will vary over time and may result in more or less material changes in
overall capital requirements. Additionally, although the final rule is
intended to calibrate the eSLR standards to serve as a backstop to
risk-based capital requirements rather than as a constraint that is
frequently binding, the eSLR standards may nonetheless, in certain
circumstances, serve as the binding constraint. As discussed in section
IV of this SUPPLEMENTARY INFORMATION, the supplementary leverage ratio
is currently the binding tier 1 capital requirement for almost all
GSIBs, creating unintended incentives and rendering tier 1 capital
requirements less risk sensitive. The agencies estimate that the final
rule will achieve the objective of making the supplementary leverage
ratio requirement a backstop to risk-based capital requirements for all
GSIBs.
---------------------------------------------------------------------------
\35\ The expected impacts of the proposal are further discussed
in section IV.F of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
The Board is not adopting modifications to the eSLR standards that
would cause them to automatically change over economic cycles or
specifically during periods of stress, as recommended by some
commenters. As discussed in section IV.F of this SUPPLEMENTARY
INFORMATION, the final rule's approach would provide significant
capacity for banking organizations to engage in low-risk, balance-sheet
intensive activities, including during periods of economic or financial
market stress. Moreover, as the agencies have previously emphasized,
capital buffers are designed to be used in times of stress.\36\
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\36\ For example, during the COVID economic event, the agencies
issued a statement and a letter emphasizing that capital and
liquidity buffers have been designed to provide banking
organizations with the means to support the economy in adverse
situations and allow banking organizations to continue to support
households and businesses. See Joint Release: Statement on the Use
of Capital and Liquidity Buffers (Mar. 17, 2020), available at
<a href="https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200317a1.pdf">https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200317a1.pdf</a>; Supervisory Letter: Questions and Answers
(Q&As) on Statement regarding the Use of Capital and Liquidity
Buffers (SR 20-5), (Mar. 19, 2020), available at <a href="https://www.federalreserve.gov/supervisionreg/srletters/SR2005.pdf">https://www.federalreserve.gov/supervisionreg/srletters/SR2005.pdf</a>.
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3. Calibration of the Depository Institution Standard
The proposal would have modified the six percent eSLR standard
applicable to a covered depository institution to instead be an eSLR
buffer standard equal to 50 percent of its parent GSIB's method 1
surcharge as determined under the Board's GSIB surcharge framework in
addition to the minimum supplementary leverage ratio requirement of
three percent. As described in the proposal, this approach would have
resulted in a lower eSLR standard for most covered depository
institutions. It also would have produced a dynamic standard that could
change from year-to-year for each banking organization subject to the
eSLR standard.
Commenters expressed a range of views on the proposed eSLR
calibration for covered depository institutions, in addition to the
comments discussed in section II.A.1 of this SUPPLEMENTARY INFORMATION.
Commenters supportive of the proposal mostly supported the proposed
modification to the eSLR standard for covered depository institutions,
as it would support the objective of an eSLR standard that generally
serves as a backstop to risk-based capital requirements and reduce
disincentives for low-risk activities, similar to the views on the
proposed
[[Page 55256]]
modification to the eSLR standard for GSIBs. These commenters also
generally supported aligning the proposed eSLR standard for covered
depository institutions with the proposed GSIB eSLR standard because,
in their view, having a consistent standard at the parent and bank-
subsidiary levels would allow GSIBs to more flexibly manage capital
allocation throughout their organizations. One commenter supportive of
the proposal noted that banking organization affiliates other than
broker-dealers also engage in activities related to U.S. Treasury
market intermediation, including depository institutions that hold
Treasury securities for investment, liquidity, or risk management, and
engage in repurchase and reverse repurchase agreements collateralized
by Treasury securities, such as inter-affiliate transactions for
funding and collateral. This commenter stated that custodian and trust
affiliates also provide services related to U.S. Treasury markets, such
as safekeeping, settlement, collateral management, and facilitation
with central counterparties. This commenter further stated that the
proposal would help reduce constraints on these entities' capacity to
conduct such activities.
As discussed above, some commenters that were generally supportive
of the proposal also asserted that the variable standard that could
result from using the risk-based surcharge applicable to GSIBs might
result in inappropriately high eSLR standards in certain cases, which
would be contrary to the intent of the proposed recalibration. To avoid
such an outcome, these commenters suggested capping the eSLR standard
at a fixed amount. According to these commenters, capping the eSLR
standard would mitigate the potential for constraints in U.S. Treasury
market and other intermediation activities that could result if
increases in the GSIB risk-based surcharge calculation over time flow
through to the eSLR calibration.
Other commenters asserted that the proposed eSLR standard for
covered depository institutions would undermine such institutions'
safety and soundness and increase the risk of bank failure, especially
in light of the expected decrease in required tier 1 capital levels at
covered depository institutions. Some of these commenters expressed
concerns that the decrease in capital could pose risks to the Deposit
Insurance Fund and would reduce loss-absorbing capacity of GSIBs and
covered depository institutions. Some of these commenters also asserted
that such concerns would not be mitigated by smaller changes in tier 1
capital requirements for GSIBs because, these commenters asserted,
GSIBs may not be well positioned to support the financial condition of
their depository institution subsidiaries in the event of stress. Some
of these commenters also noted that depository institutions facing a
capital shortfall in a downturn are less able or likely to continue
lending to customers over the course of the economic cycle. Certain
commenters expressed concern that the proposal would increase the risks
arising from insured depository institutions holding more U.S. Treasury
securities, asserting that this increase would pose risks similar to
those that impacted banking organizations and financial markets during
the 2010-12 Eurozone sovereign debt crisis. Other commenters stated
that the proposal to reduce the eSLR standards for covered depository
institutions would not improve Treasury market intermediation because
that activity is conducted through broker-dealers.
Some commenters criticized the use of the method 1 GSIB surcharge
in the proposed eSLR standard for covered depository institutions. One
commenter asserted that the agencies should not adopt this approach
because it would calibrate the eSLR standard based on factors measured
at the holding company level that may diverge substantially from the
measurement of such risk factors for depository institutions,
especially where such depository institutions have limited direct
international activities. As such, in this commenter's view, the
proposed eSLR buffer standard may not appropriately reflect the risks
and business models of covered depository institutions. The same
commenter also asserted that using a systemic risk measure, such as a
GSIB's method 1 surcharge, for the leverage capital requirements but
not the risk-based capital requirements of covered depository
institutions would create inconsistency in the regulatory capital
framework.
After reviewing the comments and considering the potential impact
of reducing the eSLR standard for covered depository institutions, the
agencies have decided to adopt an eSLR buffer standard applicable to
covered depository institutions equal to 50 percent of a covered
depository institution's parent GSIB's method 1 surcharge, capped at
one percent.\37\ The cap recognizes that the method 1 surcharge of a
parent GSIB may be in part driven by activities outside of the covered
depository institution. As such, the agencies consider it appropriate
to limit the role that a depository institution's affiliates play in
sizing capital requirements applicable to the depository institution
itself.
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\37\ The eSLR buffer standard applicable to a national bank or
Federal savings association that is a subsidiary of a U.S. top-tier
bank holding company with total consolidated assets of more than
$700 billion or assets under custody of more than $10 trillion that
does not have a parent GSIB method 1 surcharge is one percent.
---------------------------------------------------------------------------
In addition, because covered depository institutions, unlike GSIBs,
are not subject to the GSIB risk-based capital surcharge or the stress
capital buffer requirement, the final rule's capped approach helps to
better ensure that the eSLR standard serves as a backstop to risk-based
capital requirements for covered depository institutions, as compared
to an uncapped approach. Moreover, compared to the proposal, imposing a
cap of one percent would have a similar aggregate impact on capital
requirements based on covered depository institutions' current assets
and exposures. Therefore, this approach supports the objectives of
establishing the eSLR standard for covered depository institutions that
serves as a backstop to risk-based capital requirements, rather than as
a frequently binding requirement.
Under the final rule, covered depository institutions must maintain
the eSLR buffer in addition to the minimum supplementary leverage ratio
of three percent to avoid restrictions on capital distributions and
certain discretionary bonus payments. In addition, insured depository
institutions must maintain the three percent minimum supplementary
leverage ratio to be considered ``adequately capitalized'' under the
prompt corrective action framework, as discussed further in section
II.A.4 of this SUPPLEMENTARY INFORMATION.
The final rule does not adopt an adjustment to the eSLR standard
calibration for covered depository institutions that are custodial
banking organizations, as suggested by one commenter. As discussed
above for the eSLR standard for GSIBs, no such adjustment to the eSLR
standards applies under the current rule, and the final rule does not
change this approach for covered depository institutions.
As discussed in section IV of this SUPPLEMENTARY INFORMATION, the
agencies estimate that the final rule will set the level of the
supplementary leverage ratio requirement below the level of the risk-
based tier 1 capital requirement for the majority of major
[[Page 55257]]
covered depository institutions.\38\ Accordingly, the recalibrated eSLR
buffer standard under the final rule generally achieves the objective
of adjusting the eSLR standard so that it better serves as a backstop
to risk-based capital requirements for covered depository institutions.
As discussed above and consistent with the objective of the proposal,
reducing the eSLR buffer for covered depository institutions reduces
disincentives for these banking organizations to participate in low-
risk, low-return activities.
---------------------------------------------------------------------------
\38\ In the economic analysis, a ``major covered depository
institution'' refers to a GSIB's largest depository institution
subsidiary as well as any of its depository institution subsidiaries
with total assets greater than $50 billion at the end of any quarter
in 2024.
---------------------------------------------------------------------------
The final rule's calibration would result in a reduction in the
level of covered depository institutions' tier 1 capital
requirements.\39\ Under the agencies' current prompt corrective action
framework, covered depository institutions must maintain a level of
tier 1 capital to be considered ``well capitalized'' that is higher
than the level required by the risk-based capital framework for these
depository institutions. The final rule would improve the alignment of
the eSLR standards for covered depository institutions with their risk-
based capital requirements, which take into account these entities'
risk profiles. In so doing, the final rule would help to reduce the
negative incentive effects that can result when leverage requirements,
rather than risk-based capital requirements, are too frequently
binding. The final rule would not change the risk-based capital
requirements of covered depository institutions.
---------------------------------------------------------------------------
\39\ See section IV of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
In addition, although the capital requirements of covered
depository institutions would decrease, the capital requirements
applicable to GSIBs generally would remain near their present level,
with better incentive effects from leverage-based requirements
declining below risk-based requirements.\40\ As a consequence, the
final rule would not materially alter the ability of these consolidated
banking organizations to distribute capital to shareholders. Under the
final rule, GSIBs would have greater flexibility in allocating capital
among different subsidiaries and would continue to be required to act
as a source of strength for their depository institution subsidiaries,
including in the event of financial stress.
---------------------------------------------------------------------------
\40\ As discussed in Section IV.E this SUPPLEMENTARY
INFORMATION, the new calibration of the eSLR standard would reduce
the aggregate tier 1 capital required by the eSLR for the major
covered depository institutions by about 37 percent.
---------------------------------------------------------------------------
4. Modification to the Form of the Depository Institution Standard
The proposal would have removed the eSLR threshold for a covered
depository institution to be considered ``well capitalized'' under the
prompt corrective action framework and instead implemented the eSLR as
a buffer standard for covered depository institutions.
The prompt corrective action framework establishes capital
categories at which an insured depository institution will become
subject to increasingly stringent limitations on its activities.\41\
Among other measures, the prompt corrective action framework includes a
three percent supplementary leverage ratio threshold for any insured
depository institution subject to Category I-III capital standards to
be considered ``adequately capitalized.'' Until the adoption of the
eSLR standards in 2014, the prompt corrective action framework did not
specify a corresponding supplementary leverage ratio threshold at which
such an insured depository institution subsidiary would be considered
``well capitalized.'' The 2014 eSLR standards established a six percent
supplementary leverage ratio threshold at which covered insured
depository institution subsidiaries of the largest and most complex
banking organizations would be considered ``well capitalized.''
---------------------------------------------------------------------------
\41\ Each of the agencies have issued regulations to implement
the statutory prompt corrective action framework, set forth at 12
U.S.C. 1831o, which codifies section 131 of the Federal Deposit
Insurance Corporation Improvements Act of 1991 (FDICIA), Public Law
102-242, 105 Stat. 2253 (Dec. 19, 1991). The prompt corrective
action capital categories are critically undercapitalized,
significantly undercapitalized, undercapitalized, adequately
capitalized, and well capitalized. See 12 CFR part 6 (national banks
and Federal savings associations) (OCC); 12 CFR part 208, subpart D
(state member banks) (Board); 12 CFR part 324, subpart H (state
nonmember banks and state savings associations) (FDIC).
---------------------------------------------------------------------------
The proposal would have removed the six percent supplementary
leverage ratio threshold from the definition of ``well capitalized'' in
the prompt corrective action framework and instead would have
implemented the eSLR standard for covered depository institutions as a
regulatory capital buffer. If a covered depository institution's
supplementary leverage ratio dropped below the buffer amount, under the
proposal, the institution would become subject to increasingly strict
limitations on its ability to make certain capital distributions,
including the issuance of dividends, and to pay certain discretionary
bonuses. This approach would have aligned the form of the depository
institution eSLR standard with that of the holding company eSLR
standard.
Some commenters expressed strong support for the proposal to remove
the eSLR standard from the prompt corrective action framework. These
commenters noted that implementing the eSLR as a regulatory capital
buffer at both the holding company and covered depository institution
levels would better harmonize the standards and promote more coherent
capital management across consolidated GSIB organizations. These
commenters also stated that the buffer approach would ensure that
regulators maintain flexibility necessary for dealing with a depository
institution with decreasing capital. The commenters stated a buffer
would act as an early warning and trigger changes in a banking
organization's capital management before more severe consequences of
the prompt corrective action framework apply.
One commenter supported the proposed change and advocated for
removing all leverage-based thresholds from the prompt corrective
action framework, based on a view that the prompt corrective action
framework should be based only on risk-based capital measures. This
commenter stated that adopting a buffer approach that would only impose
limits on distributions, rather than the more severe limitations
included in the prompt corrective action framework, would help ensure
the eSLR standard serves as a backstop to the risk-based capital rules.
After reviewing the comments and considering the potential impact
of applying the eSLR standard to covered depository institutions as a
regulatory capital buffer, rather than as part of the definition of
``well capitalized'' in the prompt corrective action framework, the
agencies have decided to finalize this aspect of the proposal as
proposed. The agencies are retaining the minimum supplementary leverage
ratio threshold of three percent to be considered ``adequately
capitalized'' under the prompt corrective action framework.\42\
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\42\ Under section 38 of the FDI Act, the agencies are required
to prescribe relevant capital measures for the prompt corrective
action framework that incorporate leverage-based requirements. See
12 U.S.C. 1831o(c)(1)(A)(i).
---------------------------------------------------------------------------
The agencies continue to expect that a buffer approach will enhance
effective capital management across a banking organization, have fewer
pro-cyclical effects as it would provide ``early warning'' benefits
relative to the prompt
[[Page 55258]]
corrective action-based approach, and lessen the likelihood that a
covered depository institution will reduce lending and other activities
during times of economic stress.
At the same time, the payout restrictions of a leverage buffer
framework will provide an incentive for covered depository institutions
to maintain sufficient capital and reduce the risk that their capital
levels may fall below their minimum requirements during economic
downturns.
Consistent with the proposal, the final rule implements a leverage
buffer framework that follows the same general mechanics and structure
as the capital conservation buffer and the leverage buffer applicable
to GSIBs currently contained in the agencies' respective capital rules.
A covered depository institution will need to have a supplementary
leverage ratio equal to three percent minimum supplementary leverage
ratio requirement plus the eSLR buffer standard to avoid limitations on
capital distributions and certain discretionary bonus payments. If the
covered depository institution maintains a leverage buffer that is less
than or equal to 100 percent of its leverage buffer standard, a payout
limitation will apply in accordance with Table 1 below. The limitations
on distributions and discretionary bonus payments will be applied to a
covered depository institution alongside any limitations imposed by the
capital conservation buffer or any other supervisory or regulatory
measures. If the depository institution is constrained by either the
capital conservation buffer or the leverage buffer, or both, the
depository institution will be required to apply the more binding
payout ratio.
[GRAPHIC] [TIFF OMITTED] TR01DE25.011
B. Amendments to Total Loss-Absorbing Capacity and Long-Term Debt
Requirements
The proposal would have made conforming amendments to the leverage-
based components of the Board's TLAC and long-term debt requirements to
maintain alignment of these components with the eSLR buffer standard
for GSIBs. Under the TLAC framework, GSIBs must maintain outstanding
minimum levels of TLAC based on risk-based and leverage-based measures.
GSIBs must also maintain TLAC levels sufficient to meet buffers on top
of both the risk-weighted asset and leverage components of the TLAC
requirements in order to avoid
[[Page 55259]]
limitations on their capital distributions and certain discretionary
bonus payments.\43\ The leverage-based TLAC buffer is equal to two
percent, above the 7.5 percent minimum leverage component of a GSIB's
external TLAC requirement.\44\ This buffer amount was expressly
designed to align with the eSLR buffer standard applicable to these
firms.\45\ Accordingly, the Board proposed to replace the two percent
TLAC leverage buffer with a new TLAC leverage buffer equal to the eSLR
buffer standard under the proposal.
---------------------------------------------------------------------------
\43\ See 12 CFR part 252, subpart G.
\44\ See 12 CFR 252.63. There is no buffer requirement over the
leverage-based minimum total loss-absorbing capacity requirement for
a U.S. intermediate holding company of a foreign banking
organization subject to TLAC requirements. The TLAC requirement
based on total leverage exposure for a U.S. intermediate holding
company of a foreign banking organization subject to the TLAC
framework is either 6.75 percent or six percent, depending on the
planned resolution strategy of the company's parent global
systemically important foreign banking organization. 12 CFR 252.165.
\45\ See ``Total Loss-Absorbing Capacity, Long-Term Debt, and
Clean Holding Company Requirements for Systemically Important U.S.
Bank Holding Companies and Intermediate Holding Companies of
Systemically Important Foreign Banking Organizations,'' 82 FR 8266,
at 8276 (Jan. 24, 2017).
---------------------------------------------------------------------------
The Board also requires GSIBs to maintain a minimum leverage-based
external long-term debt amount equal to a GSIB's total leverage
exposure multiplied by 4.5 percent. As described in the preamble to the
final rule that established the long-term debt requirement, the
requirement was calibrated primarily on the basis of a ``capital
refill'' framework.\46\ According to the capital refill framework, the
objective of the external long-term debt requirement is to ensure that
each GSIB has a minimum amount of eligible external long-term debt such
that, if the GSIB's going-concern capital is depleted and the covered
bank holding company fails and enters resolution, the eligible external
long-term debt can be used to replenish the GSIB's going-concern
capital to at least the amount required to meet the minimum leverage
capital requirement and buffer applicable to GSIBs. Therefore, the
Board proposed to revise the minimum leverage-based external long-term
debt requirement to reflect the proposed change to the eSLR standard.
The proposed minimum leverage-based external long-term debt requirement
would have been total leverage exposure multiplied by 2.5 percent (the
minimum supplementary leverage ratio of three percent minus 0.5
percentage points to allow for balance sheet depletion) plus the eSLR
buffer standard under the proposal.
---------------------------------------------------------------------------
\46\ 82 FR 8266, at 8275 (Jan. 24, 2017).
---------------------------------------------------------------------------
The Board also requested comments on other potential adjustments to
the TLAC and long-term debt framework that it should consider,
including whether the Board should apply a 50 percent haircut on the
amount of long-term debt principal that is due to be paid in one year
or more but less than two years that can be considered for purposes of
the minimum TLAC requirements and buffers. In addition, the Board
requested comment on the advantages and disadvantages of adjusting the
amount of balance sheet run-off embedded in the minimum long-term debt
requirement or of removing the assumption of balance sheet run-off
entirely from the minimum long-term debt requirement.
The Board received several comments on the proposed changes to the
TLAC and long-term debt requirements. Many commenters supported the
proposed changes, seeing them as necessary to maintain the internal
consistency of the Board's regulatory framework. Some commenters
opposed the proposed modifications to TLAC and long-term debt
requirements, asserting that they would undermine the orderly
resolution of GSIBs and weaken the safety and soundness of the U.S.
banking system, particularly given these commenters' concerns with
declines in capital requirements resulting from the proposal. One
commenter suggested that the Board clarify how the proposed changes
would interact with the resolution planning process.
In response to a question asking whether the Board should apply a
50 percent haircut on certain long-term debt used to satisfy the TLAC
requirement and buffers, some trade association and banking
organization commenters recommended that the Board not do so, arguing
that the 50 percent haircut would add significant costs for issuers
without material benefits. Some commenters also recommended that the
Board eliminate, or reduce, the long-term debt requirement and thereby
allow firms greater flexibility to determine the composition of their
TLAC. Some trade association and banking organization commenters also
recommended that the Board eliminate the existing 50 percent haircut on
long-term debt that is due to be paid in one year or more but less than
two years and which is used to satisfy the long-term debt requirement
as well as the assumption of balance sheet run-off. Several commenters
recommended that the agencies rescind the 2023 long-term debt proposal
applicable to certain non-GSIBs. One commenter suggested that the TLAC
requirement applicable to U.S. intermediate holding companies of
foreign banking organizations be recalibrated to account for their risk
profiles, local supervisory frameworks, and particular structural
considerations.
The final rule revises the TLAC and long-term debt requirements as
proposed. As discussed in the proposal, these changes maintain
alignment between the TLAC and long-term debt requirements and the
enhanced supplementary leverage ratio standard for GSIBs, in accordance
with the manner in which these requirements were originally calibrated.
Consistent with the proposal, the final rule does not change the
minimum level of TLAC that a GSIB is required to maintain or change the
general structure of the TLAC and long-term debt frameworks.
As discussed in section IV.I of this SUPPLEMENTARY INFORMATION, the
final rule results in a reduction in the overall level of TLAC for some
GSIBs and in the levels of long-term debt necessary to comply with the
long-term debt requirement for all GSIBs. However, GSIBs will continue
to be subject to robust TLAC and long-term debt requirements.
The Board considered commenters' views on other potential
modifications it could make to the TLAC and long-term debt frameworks.
Consistent with the proposal, the Board is not making any further
changes to the TLAC and long-term debt frameworks at this time and is
amending these requirements only to maintain alignment with the eSLR
standards.
C. Applicability Thresholds of the eSLR Standard for OCC-Supervised
Institutions
The OCC's eSLR standard applies to national banks and Federal
savings associations that are subsidiaries of holding companies with
more than $700 billion in total consolidated assets or more than $10
trillion in total assets under custody.
In the proposal, the OCC proposed to revise the applicability
thresholds of its eSLR standard to be consistent with the Board's
regulations for identifying GSIBs and applying the eSLR standard only
to national banks and federal savings associations that are
subsidiaries of bank holding companies identified as GSIBs. In the
proposal, the OCC further noted that the asset thresholds the OCC uses
to determine applicability of the eSLR standard scope in all the
national bank and federal savings association subsidiaries of GSIBs,
but no other institutions. Therefore, this proposed change would not
have had any practical impact on the current application of the eSLR
[[Page 55260]]
standard to national banks and federal savings associations.
Some commenters supported the proposal to revise the scope of the
OCC's eSLR standard and asserted that it would be appropriate to remove
the thresholds based on asset size and custody activities and instead
reference the GSIB determinations made under the Board's rules. The
commenters asserted this revision would have harmonized the OCC, FDIC,
and Board rules and would not result in unintended consequences.
One commenter, on the other hand, argued against adopting this
aspect of the proposal. This commenter acknowledged that the proposed
change would not have any immediate impact, but it noted that the OCC's
standard was potentially broader than the Board's and FDIC's and may
capture different banking organizations at some point in the future.
The commenter further suggested expanding the application of the eSLR
standard to scope in even more organizations, including those with well
below $700 billion in total consolidated assets because, according to
the commenter, the failure of large regional banking organizations can
pose systemic risks.
The OCC has decided not to finalize this aspect of the proposal.
The asset thresholds the OCC currently uses to determine the
applicability of the eSLR standard scope in all the national bank and
federal savings association subsidiaries of GSIBs, but no other
institutions. Therefore, the decision not to finalize this aspect of
the proposal will have no impact on which entities will currently be
subject to the eSLR standard.
Regardless of whether their parent holding companies are identified
as GSIBs by the Board, the OCC believes the eSLR standard should apply
to those national banks and federal savings associations that the OCC
determines pose the greatest risks to public and private stakeholders
in the event of adverse performance, disruption, or failure of the
national banks or federal savings associations or the activities they
engage in. The OCC will continue to monitor the national banks and
federal savings associations under its supervision and as the banking
industry grows, the OCC will consider whether changes are needed to
ensure the continued appropriate application of the eSLR standard
through a future rulemaking action, if necessary.
D. Comments on Other Potential Modifications to the Supplementary
Leverage Ratio Requirement and Other Elements of the Agencies'
Regulatory Framework
In addition to the proposed changes to the eSLR standards, the
proposal requested comment on potential additional or alternative
changes the agencies could make that would achieve the objectives of
the proposal. The Board requested comment on a specific potential
additional change, the narrow exclusion approach described above. The
proposal also requested comment on other changes to the bank regulatory
framework that the agencies should consider to reduce regulatory
impediments to well-functioning U.S. Treasury markets.
Many commenters opposed any exclusions from the supplementary
leverage ratio denominator, including the narrow exclusion approach.
Some commenters asserted that the narrow exclusion approach would
diminish the effectiveness of the supplementary leverage ratio
requirement, which broadly treats assets and exposures in a risk-
insensitive manner, and that the narrow exclusion approach would prompt
requests for additional exclusions that would further erode the risk-
insensitive nature of the requirement. Other commenters asserted that
the narrow exclusion approach--and other approaches that exclude assets
or exposures from the supplementary leverage ratio denominator--would
represent a departure from the Basel Committee's leverage ratio
framework and could invite a ``race to the bottom'' in the
international regulatory treatment of sovereign exposures.
Additionally, some commenters expressed concern that the narrow
exclusion approach would lead banking organizations to increase
holdings of Treasury securities, including longer-dated securities that
carry greater interest rate risk, a scenario which, in these
commenters' view, could lead to banks having inadequate capital to
absorb losses from shifts in market interest rates. Finally, one
commenter expressed doubt that the narrow exclusion would result in a
meaningful increase of U.S. Treasury market intermediation.
A few commenters supported including the narrow exclusion approach
in a final rule, and some additional commenters expressed openness to
this concept but supported finalizing the proposal without the narrow
exclusion. One commenter stated that the narrow exclusion approach may
aid market intermediation while limiting additional exposure to
interest rate risk, since the securities excluded from total leverage
exposure would be trading securities measured at fair value and would
be subject to the market risk capital requirements of the risk-based
capital framework. Another commenter asserted that the narrow exclusion
approach would provide some incremental support for Treasury market
intermediation, but the approach's benefit would be limited by the
current method 2 GSIB surcharge calculation in the risk-based capital
framework.
Other commenters suggested broader exclusions from the
supplementary leverage ratio denominator. Some commenters suggested
excluding banking organizations' deposits held at central banks
(reserves); reserves and short-term Treasury securities; or reserves
and all Treasury security holdings. In addition, one commenter
supported excluding from the denominator of the supplementary leverage
ratio all reserves, Treasury securities, and repurchase and reverse
repurchase agreements backed by Treasury security collateral across all
entities within a banking organization. A few commenters called for
applying some of these exclusions to all leverage capital requirements
applicable to banking organizations. Some commenters requested that the
agencies state that they may exclude certain assets from total leverage
exposure during exceptional macroeconomic circumstances, as the
agencies did on a temporary basis through interim final rules in 2020,
as the onset of the COVID-19 pandemic significantly and adversely
affected global financial markets.\47\
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\47\ See ``Temporary Exclusion of U.S. Treasury Securities and
Deposits at Federal Reserve Banks from the Supplementary Leverage
Ratio,'' 85 FR 20578 (Apr. 14, 2020); ``Regulatory Capital Rule:
Temporary Exclusion of U.S. Treasury Securities and Deposits at
Federal Reserve Banks from the Supplementary Leverage Ratio for
Depository Institutions,'' 85 FR 32980 (June 1, 2020).
---------------------------------------------------------------------------
The final rule does not adopt the narrow exclusion approach or
other exclusions requested by commenters. As discussed in the proposal
and in section IV of this SUPPLEMENTARY INFORMATION, and as observed by
many of the commenters, the final rule's changes to the eSLR standards
achieve the objectives of the rulemaking and continues to broadly treat
exposures equally under the supplementary leverage ratio framework.
The proposal also included a question about potential additional
modifications to the regulatory capital framework that the agencies
should consider to reduce
[[Page 55261]]
regulatory impediments to well-functioning U.S. Treasury markets. Many
commenters recommended several additional changes to the regulatory
capital framework for the agencies to consider in potential future
rulemakings. Specifically, some commenters suggested modifying the GSIB
surcharge framework by, for example, removing U.S. Treasury security
holdings or other assets or exposures from the GSIB surcharge
calculation and recognizing the risk-mitigation effects of cross-
product master netting agreements in the standardized approach for
counterparty credit risk.\48\ Some commenters advocated for changes to
the tier 1 leverage ratio requirement, such as a reduction in the level
of the requirement at the holding company and depository institution
levels or exclusion of certain assets, such as reserves, Treasury
securities, and certain other Treasury-collateralized exposures, from
the denominator of the ratio.
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\48\ 12 CFR 3.132(c) (OCC); 12 CFR 217.132(c) (Board); 12 CFR
324.132(c) (FDIC).
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Some commenters suggested removing supplementary leverage ratio
requirements for certain banking organizations, such as Category III
banking organizations and U.S. intermediate holding companies of
foreign banking organizations with less than $250 billion in total
assets. Some other commenters recommended modifications to the
calibration of the community bank leverage ratio requirement to a level
lower than the current nine percent calibration.
Some commenters advocated for changes to elements of the agencies'
regulatory frameworks that are not related to leverage requirements.
For example, some commenters advocated that the agencies should adjust
certain regulatory thresholds based on factors such as economic growth
or inflation. A few commenters suggested changes to the Board's method
2 GSIB surcharge calculation, the Board's supervisory stress tests, the
applicability of the global market shock component of the stress test,
and the stress capital buffer requirement. Some commenters also
expressed concerns that the method 1 GSIB surcharge calculation
incorporates global data to compute aggregate global indicator amounts.
Other commenters suggested specific changes to the risk-based capital
framework. One commenter suggested removing Treasury security cash-
market and repurchase agreement positions from certain risk-based
indicators of the agencies' regulatory tailoring framework for large
banking organizations and removing from the off-balance sheet exposure
risk-based indicator exposures that arise in connection with central
clearing services for U.S. Treasury security-related transactions
provided by a clearing member banking organization to another firm. One
commenter called for mandating equity issuance or retention of capital
to avoid what the commenter viewed as inefficiencies in changing ratio-
based capital requirements, and another commenter called for inclusion
of weather- and climate-related risks in the capital framework. One
commenter expressed concern that the Board has not yet adopted a
countercyclical capital buffer requirement greater than zero and has
not yet responded to a petition for rulemaking related to the boards of
directors of holding companies and their subsidiary depository
institutions.
The final rule does not address these requests, as they are beyond
the scope of the proposal. As noted previously, the agencies monitor
the effectiveness of their rules for potential improvements and may
make changes in the future as appropriate.
E. Technical Corrections
The proposal would have implemented certain technical corrections.
The Board proposed to revise 12 CFR 217.11(c)(3)(ii)(A) through (C) to
correct certain cross-references. Those paragraphs had erroneously
referred to 12 CFR 217.10(c)(1)(ii), (c)(2)(ii), and (c)(3)(ii),
respectively; the proposed technical correction would have replaced
those references with the appropriate references to 12 CFR
217.10(d)(1)(ii), (d)(2)(ii), and (d)(3)(ii), respectively. Second, the
FDIC proposed to remove outdated references in its prompt corrective
action regulation to the supplementary leverage ratio's effective date
of January 1, 2018. The Board and FDIC did not receive comments on the
proposed technical corrections. The Board and FDIC are finalizing the
technical corrections as proposed.
Additionally, the Board is finalizing additional technical
corrections that were not included in the proposal but are related to
the same incorrect cross-reference. First, the Board is revising 12 CFR
208.41(d), (m), and (p). Those paragraphs had erroneously referred to
12 CFR 217.10(c)(1), (c)(2), and (c)(3), respectively; the Board is
replacing those references with appropriate references to 12 CFR
217.10(d)(1), (d)(2), and (d)(3), respectively. Second, the Board is
revising the definition of ``common equity tier 1 capital ratio'' in
both 12 CFR 252.61 (``common equity tier 1 capital ratio'') and 12 CFR
252.161 (``common equity tier 1 capital ratio''). Those definitions had
erroneously referred to 12 CFR 217.10(c); the Board is replacing those
references with appropriate references to 12 CFR 217.10(d).
Additionally, the Board is removing paragraph 12 CFR
208.43(a)(1)(iv)(C), which is now unnecessary.
III. Effective Date
The agencies received several comments relating to the length of
the comment period on the proposal, timing of adoption of a final rule,
and the effective date of a final rule.
Several commenters asked the agencies to withdraw the proposal or
delay adoption of the final rule and, instead, prioritize changes to
risk-based capital requirements. Specifically, these commenters
asserted that the agencies should delay adoption of the proposed
modifications of the eSLR standards until completion of a further study
and additional public comment on the effect of other potential changes
to the regulatory capital framework on the proposal. Other commenters
requested an extension of the comment period before finalizing the
proposal. In these commenters' view, the proposal has significant
implications and warrants a longer comment period than 60 days to
ensure meaningful public participation.
Several other commenters asked the agencies to adopt the proposal
as a final rule without delay. Of these, some commenters suggested that
the effective date for implementation of the final rule should be no
later than January 1, 2026, or as promptly as possible. One commenter
noted that prompt adoption is particularly important, given the
implementation of mandatory clearing for certain U.S. Treasury security
transactions.
The agencies received approximately 40 comments on the proposal.
The comments received by the agencies represent a broad range of views
and included thoughtful engagement with the proposal.\49\ The agencies
do not consider an extension of the comment period to be warranted,
given the volume, depth, and diversity of comments submitted.
---------------------------------------------------------------------------
\49\ In addition, on July 22, 2025, the Board held a conference
on the capital framework for large banking organizations, which was
publicly streamed and available on the Board's website. See
Integrated Review of the Capital Framework for Large Banks
Conference (July 22, 2025), <a href="https://www.federalreserve.gov/conferences/integrated-review-of-the-capital-framework-for-large-banks.htm">https://www.federalreserve.gov/conferences/integrated-review-of-the-capital-framework-for-large-banks.htm</a>.
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The final rule includes an effective date of April 1, 2026, for the
modified eSLR standard applicable to GSIBs and
[[Page 55262]]
covered depository institutions. This effective date is intended to
provide banking organizations subject to the rule with time to comply
with the modified eSLR standards. The agencies will permit GSIBs and
covered depository institutions subject to the eSLR standards to elect
to voluntarily adopt the final rule's modified eSLR standards as of
January 1, 2026, prior to the mandatory compliance date.
IV. Economic Analysis
A. Introduction
As discussed in section I.B of this SUPPLEMENTARY INFORMATION, the
final rule aims generally for the supplementary leverage ratio
requirement to be a backstop to risk-based tier 1 capital requirements
for GSIBs and covered depository institutions.\50\ The final rule's
changes reduce the likelihood and frequency of the supplementary
leverage ratio requirement being a binding tier 1 capital requirement
for these banking organizations. As a consequence, the changes reduce
disincentives for these organizations to participate in low-risk, low-
return activities, such as U.S. Treasury market intermediation.
---------------------------------------------------------------------------
\50\ Throughout the economic analysis section, the agencies use
the term ``supplementary leverage ratio requirement'' to refer to
the combination of the supplementary leverage ratio minimum
requirement, which is three percent for all banking organizations
subject to Category I-III standards, plus the eSLR standards, which
are an additional two percent for GSIBs and an additional three
percent for covered depository institutions. See Section I.A of this
SUPPLEMENTARY INFORMATION for a detailed description of the eSLR
standards.
---------------------------------------------------------------------------
In recent years, the supplementary leverage ratio requirement has
regularly been the binding tier 1 capital requirement for many GSIBs
and most covered depository institutions. This can create unintended
incentives for these banking organizations to engage in higher-risk
activities and to reduce their participation in low-risk, low-return
activities. The final rule will address these incentives by reducing
the calibration of the eSLR standards. As a consequence, the final rule
increases the balance sheet capacity of most GSIBs for low-risk
activities, which can reduce the need for temporary policy adjustments
in the event of severe market stress.
The agencies estimate that, in the period from the second quarter
of 2021 to the fourth quarter of 2024, the supplementary leverage ratio
requirement was the binding tier 1 capital requirement 60 percent of
the time, on average, for seven out of the eight GSIBs. In the same
period, the supplementary leverage ratio requirement was the binding
tier 1 capital requirement 87 percent of the time, on average, for
major covered depository institutions.
When the binding capital requirement for a banking organization is
a leverage ratio requirement, it can discourage the banking
organization from engaging in low-risk activities, especially in high-
volume, low-return activities, while creating incentives for the
organization to conduct higher-risk activities. These incentives are
due to what may be called the ``level effect'' and the ``marginal
effect'' of a binding leverage ratio requirement. Specifically, for a
given amount of tier 1 capital, the level effect of a binding leverage
ratio requirement restricts the growth of the banking organization
because it cannot engage in even low-risk activities without further
increasing its tier 1 capital requirement. Additionally, the marginal
effect of a binding leverage ratio requirement makes the banking
organization prefer higher-risk activities to low-risk activities
because both activities need to be financed by the same amount of tier
1 capital under the supplementary leverage ratio requirement, while
higher-risk activities typically have higher expected returns. This
marginal effect could incentivize the banking organization to forego
investments in low-risk activities or substitute its existing low-risk
exposures with higher-risk ones. Such unintended incentives are further
amplified by the fact that low-risk activities tend to be balance sheet
intensive because their typically low expected returns make them
profitable only if they are conducted in large volumes. Hence, general
economic theory predicts that a binding leverage ratio requirement can
discourage banking organizations from engaging in low-risk activities,
which might reduce social welfare.
A prime example of such low-risk, low-return, high-volume
activities conducted by banking organizations is intermediation in the
U.S. Treasury market, a key financial market.\51\ Acting as
intermediaries in this market, banking organizations enter into
temporary positions in U.S. Treasury securities, classified as trading
assets on their balance sheets. Most of these trading assets are held
by the broker-dealer subsidiaries of banking organizations to
facilitate transactions across different participants and segments in
the U.S. Treasury market.\52\ These broker-dealers play a critical role
in the U.S. Treasury market by providing liquidity to market
participants through both market making and securities financing
activities; \53\ in particular, GSIBs' primary dealer subsidiaries are
the largest U.S. Treasury securities dealers.\54\
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\51\ The U.S. Treasury market is a key financial market because
it (i) constitutes an important channel through which the Federal
Reserve can conduct its monetary policy; (ii) enables the U.S.
government to obtain financing at a low and stable cost; (iii)
provides the yield curve widely used as a risk-free benchmark in the
valuation of other financial assets and derivatives; and (iv) offers
a large supply of safe and liquid assets for global investors.
\52\ See the discussion related to Table 5 in section IV.B of
this SUPPLEMENTARY INFORMATION.
\53\ The activities of U.S. Treasury securities dealers extend
well beyond buying and selling U.S. Treasury securities outright in
the primary and secondary markets. In particular, these entities
also act as key counterparties in secured financing and derivatives
transactions. For a detailed analysis of how the activities and
positions of the broker-dealer subsidiaries of GSIBs evolved over
time, see P. Cochran et al., Dealers' Treasury Market Intermediation
and the Supplementary Leverage Ratio, FEDS Notes, Board of Governors
of the Federal Reserve System (Aug. 3, 2023).
\54\ One commenter requested that the agencies further explain
why GSIBs are important for U.S. Treasury market intermediation.
While all primary dealers in general play a critical role as
intermediaries in the U.S. Treasury market and dedicated
counterparties of the Federal Reserve Bank of New York, as described
at <a href="https://www.newyorkfed.org/markets/primarydealers">https://www.newyorkfed.org/markets/primarydealers</a> in more detail,
the broker-dealers of GSIBs are particularly important market
participants. Indeed, the six largest U.S. Treasury securities
dealers are all subsidiaries of GSIBs, whose activities therefore
have an outsized influence on the liquidity and price dynamics in
the U.S. Treasury market. See, e.g., P. Cochran et al., Dealers'
Treasury Market Intermediation and the Supplementary Leverage Ratio,
FEDS Notes, Board of Governors of the Federal Reserve System (Aug.
3, 2023) and J. Goldberg, Liquidity Supply by Broker-Dealers and
Real Activity, Journal of Financial Economics, 136(3) (Apr. 14,
2020).
---------------------------------------------------------------------------
As discussed in the proposal, both the U.S. Treasury market and
primary dealers' U.S. Treasury securities positions have grown rapidly
over the last decade. As Table 2 shows, the amount of U.S. Treasury
securities outstanding, excluding holdings of the Federal Reserve
System Open Market Account (SOMA), has expanded by 139 percent, from
$10 trillion to $24 trillion, since 2014.\55\ Meanwhile, the U.S.
Treasury securities positions of primary dealers have grown by 155
percent, reaching $0.6 trillion in aggregate. This expansion in primary
dealers' U.S. Treasury securities positions reflects both the abundant
supply of these securities and the central role of these broker-dealer
subsidiaries of banking organizations as intermediaries in this market.
Notably, despite the rapid increase in primary dealers' U.S.
[[Page 55263]]
Treasury securities positions, measured in dollar terms, the size of
these positions relative to the size of the market has been stable over
time. Specifically, relative to the amount of U.S. Treasury securities
outstanding, excluding holdings of the Federal Reserve System Open
Market Account, the U.S. Treasury securities positions of primary
dealers stayed at about 2.5 percent over the last decade, which
indicates the strong connection between the size of the U.S. Treasury
market and the magnitude of market intermediation activities by these
broker-dealers.\56\
---------------------------------------------------------------------------
\55\ To assess the size of the U.S. Treasury market from the
perspective of broker-dealers, the agencies exclude the U.S.
Treasury securities holdings in the Federal Reserve's SOMA because
broker-dealers' market intermediation activity is closely related to
U.S. Treasury securities held by the public sector.
\56\ The positive empirical relationship between the size of the
U.S. Treasury market and primary dealers' U.S. Treasury securities
positions is also documented in P. Cochran et al., Assessment of
Dealer Capacity to Intermediate in Treasury and Agency MBS Markets,
FEDS Notes, Board of Governors of the Federal Reserve System (Oct.
22, 2024).
[GRAPHIC] [TIFF OMITTED] TR01DE25.012
The rapid growth of the U.S. Treasury market has raised concerns
about its liquidity and resiliency, especially considering that the
balance sheets of primary dealers, key intermediaries in this market,
have grown at a more moderate pace (by 29 percent, in aggregate, since
2014).\58\ These concerns partly drove the agencies' decision to
temporarily exclude deposits at Federal Reserve Banks and U.S. Treasury
securities holdings from the calculation of total leverage exposure for
banking organizations subject to Category I-III standards in the wake
of the COVID-19 market stress.\59\ Empirical evidence in BCBS (2021)
suggests that the exclusions enabled these banking organizations, and
especially GSIBs, which had smaller supplementary leverage ratio
management buffers than banking organizations subject to Category II
and III standards, to significantly expand their U.S. Treasury
securities holdings.\60\
---------------------------------------------------------------------------
\57\ In this table, the agencies use publicly available data
reported in field FL313161105 of the Financial Accounts of the
United States (Z.1) for the amount of U.S. Treasury securities
outstanding; the Federal Reserve Bank of New York's public reports
for the amount of U.S. Treasury securities holdings in the Federal
Reserve's SOMA, see <a href="https://www.newyorkfed.org/markets/soma-holdings">https://www.newyorkfed.org/markets/soma-holdings</a>; publicly available data reported in SEC Form X-14A-5 Part
IIA filings for the total assets of primary dealers; and the sum of
the values reported in fields GSWA M438, N749, M440, M442, M444,
M446, M448, M450, LF56, LF58, M452, M454, M456, M458 of the
confidential FR 2004A filings for the amount of long U.S. Treasury
securities positions of primary dealers, measured at the end of 2014
and 2024.
\58\ See, e.g., the discussion of concerns about U.S. Treasury
market functioning and proposed solutions in D. Duffie, Still the
World's Safe Haven? Redesigning the U.S. Treasury Market After the
COVID-19 Crisis, Hutchins Center on Fiscal and Monetary Policy,
Brookings (June 22, 2020) and N. Liang and P. Parkinson, Enhancing
Liquidity of the U.S. Treasury Market Under Stress, Hutchins Center
on Fiscal and Monetary Policy, Brookings (Dec. 16, 2020).
\59\ See the Board's and the agencies' interim final rules
temporarily excluding these assets from the calculation of total
leverage exposure for holding companies subject to Category I-III
standards, as well as their depository institution subsidiaries,
effective April 14, 2020, and June 1, 2020. 85 FR 20578 (Apr. 14,
2020); 85 FR 32980 (June 1, 2020).
\60\ Basel Committee, Early Lessons from the Covid-19 Pandemic
on the Basel Reforms, Bank for International Settlements (July 2021)
(``BCBS (2021)''). Throughout the economic analysis section, the
agencies use the term ``management buffer'' to refer to the amount
of regulatory capital that a company has in excess of the sum of its
minimum regulatory capital requirements and any regulatory capital
buffer requirements.
---------------------------------------------------------------------------
There are several factors that influence broker-dealers' decisions
to engage in financial market intermediation.\61\ As discussed in the
proposal, academic studies also provide support for the concern that
the supplementary leverage ratio requirement could potentially
discourage U.S. Treasury market intermediation by the broker-dealer
subsidiaries of large banking organizations. Favara, Infante, Rezende
(2022) find that large and unexpected increases to GSIBs' balance
sheets discourage GSIBs' broker-dealer subsidiaries from participating
in the U.S. Treasury market, with the estimated effect being stronger
for GSIBs with smaller supplementary leverage ratio management
buffers.\62\ Duffie et al. (2023) show that U.S. Treasury market
liquidity measures deteriorate as primary dealers face capacity
constraints, suggesting that a lack of ability by broker-dealers to
participate in U.S. Treasury markets can have a detrimental effect on
market liquidity.\63\ The empirical findings in Br[auml]uning and Stein
(2024) indicate that the primary dealer subsidiaries of banking
organizations subject to Category I-III standards that face relatively
more
[[Page 55264]]
binding supplementary leverage ratio requirements or internal risk
limits reduce their U.S. Treasury securities positions relative to less
constrained primary dealers, which in turn leads to a decrease in
market liquidity in the form of lower aggregate turnover and wider bid-
ask spreads.\64\ Overall, the academic literature suggests that
reducing the supplementary leverage ratio requirement's bindingness
could improve the functioning of the U.S. Treasury market.
---------------------------------------------------------------------------
\61\ For example, Li, Petrasek, Tian (2024) find that internal
risk limits are important determinants of broker-dealers' capacity
and willingness to intermediate financial markets. D. Li, L.
Petrasek and M. H. Tian, Risk-Averse Dealers in a Risk-Free Market--
The Role of Internal Risk Limits, SSRN (Mar. 1, 2024) (``Li,
Petrasek, Tian (2024)'').
\62\ G. Favara, S. Infante, and M. Rezende, Leverage Regulations
and Treasury Market Participation: Evidence from Credit Line
Drawdowns, SSRN (Aug. 4, 2022) (``Favara, Infante, Rezende
(2022)'').
\63\ D. Duffie et al., Dealer Capacity and U.S. Treasury Market
Functionality, Federal Reserve Bank of New York Staff Report (Aug.
2023, rev. Oct. 2023) (``Duffie et al. (2023)'').
\64\ F. Br[auml]uning and H. Stein, The Effect of Primary Dealer
Constraints on Intermediation in the Treasury Market, Federal
Reserve Bank of Boston Research Department Working Papers (2024)
(``Br[auml]uning and Stein (2024)'').
---------------------------------------------------------------------------
Several commenters requested evidence that the eSLR standard is
currently acting as a constraint to U.S. Treasury market
intermediation, with some commenters noting that internal risk limits
could also constrain such activities. One commenter noted that GSIBs
may not purchase more U.S. Treasury securities under the proposal.
Meanwhile, several commenters supported the agencies' assessment that
the eSLR is currently a binding capital constraint, which can create
unintended disincentives for GSIBs.
As discussed in section II.A of this SUPPLEMENTARY INFORMATION, the
final rule's objective is to set the supplementary leverage ratio
requirement as a backstop to risk-based tier 1 capital requirements for
GSIBs and covered depository institutions, rather than creating
incentives for these banking organizations to hold more U.S. Treasury
securities. Accordingly, as discussed in section IV.F of this
SUPPLEMENTARY INFORMATION, the agencies anticipate that the final rule
will reduce unintended disincentives for GSIBs to engage in low-risk
activities through both its marginal and level effect. In particular,
the level effect of the final rule will create additional capacity for
these banking organizations to hold low-risk assets on their balance
sheets. One notable example where this benefit may manifest is the U.S.
Treasury market intermediation activity of GSIBs, which could be
affected by balance sheet constraints, as evidenced by the empirical
studies cited above. The findings in these studies indicate that the
supplementary leverage ratio requirement could pose a potential
constraint to the intermediation activity of primary dealers, although,
as discussed in the proposal and earlier in this subsection, other
factors, such as internal risk limits can also influence broker-
dealers' decisions to participate in the U.S. Treasury market.
The structure of the economic analysis is as follows. Section IV.B
describes the baseline for the impact assessment, which is the current
regulatory framework, and the data sources used. Sections IV.C and IV.D
present the policy change and four reasonable alternatives. Section
IV.E estimates the change in the supplementary leverage ratio
requirement and the binding tier 1 capital requirement for banking
organizations subject to Category I-III standards under the final rule
and the policy alternatives, relative to the baseline. Sections IV.F
and IV.G evaluate the economic benefits and costs, respectively, of the
final rule and the policy alternatives. Section IV.H addresses further
comments received on the analysis in the proposal. Section IV.I
analyzes the impact of the changes to the long-term debt and total
loss-absorbing capacity buffer requirements under the final rule.
Section IV.J concludes the analysis.
B. Baseline
The economic analysis uses the current regulatory framework as a
baseline, which includes the current supplementary leverage ratio
requirement, described in section I.A of this SUPPLEMENTARY
INFORMATION. The baseline represents the state of banking organizations
subject to Category I-III standards in the absence of a policy change.
Accordingly, throughout the analysis, the agencies assess the economic
impact of the final rule and the policy alternatives considered,
described in sections IV.C and IV.D of this SUPPLEMENTARY INFORMATION,
respectively, by comparing outcomes estimated under the final rule and
the alternatives to the outcome estimated under the baseline.
The analysis uses the year 2024 as the sample period to produce
quantitative estimates, which reflects a recent state of banking
organizations subject to Category I-III standards. Unless stated
otherwise, the calculations and estimates in the analysis take the
average values of balance sheet quantities and ratios measured at the
end of each quarter in 2024. A review of balance sheets of banking
organizations subject to Category I-III standards from 2021 to 2024
indicates that using a longer sample period yields similar
estimates.\65\
---------------------------------------------------------------------------
\65\ In response to comments, the agencies also calculate the
main impact estimates using the most recent quarter of balance sheet
data in section IV.H.1 of this SUPPLEMENTARY INFORMATION.
---------------------------------------------------------------------------
Unless stated otherwise, the analysis uses publicly available data
reported in FR Y-9C filings for holding companies and the Federal
Financial Institutions Examination Council (FFIEC) Call Reports for
depository institutions.\66\ In certain calculations related to the
total leverage exposure of holding companies, the agencies use publicly
available data reported in FFIEC 101 filings.\67\ The agencies
calculate method 1 and method 2 surcharges by using publicly available
data from FR Y-15 filings as well as the aggregate global systemic
indicator amounts published annually by the Board.\68\ The agencies
calculate the amount of U.S. Treasury securities holdings of primary
dealers by using confidential data from FR 2004A filings.\69\
---------------------------------------------------------------------------
\66\ From FR Y-9C filings, the agencies use the fields BHCA8274,
BHCAA223, BHCWA223, BHCAA224, BHCK2170, BHCK3368, BHCM3531,
BHCK0211, BHCK0213, BHCK1286, BHCK1287, BHCALE85. From FFIEC Call
Reports, the agencies use the fields RCFA8274, RCFAA223, RCFWA223,
RCFAA224, RCFD2170, RCFAH015, RCFD3531, RCFD0211, RCFD0213,
RCFD1286, RCFD1287, RCFD0090, RCON0090.
\67\ From FFIEC 101 filings, the agencies use the field
AAABH015.
\68\ From FR Y-15 filings, the agencies use the fields RISK
Y832, M362, M370, M376, M390, M405, M408, M411, N255, G506, M422,
M426, Y896. Additionally, in method 1 surcharge calculations, the
agencies use the aggregate global indicator amounts published by the
Board at <a href="https://www.federalreserve.gov/supervisionreg/basel/denominators.htm">https://www.federalreserve.gov/supervisionreg/basel/denominators.htm</a>.
\69\ From FR 2004A filings, the agencies use the sum of the
values reported in fields GSWA M438, N749, M440, M442, M444, M446,
M448, M450, LF56, LF58, M452, M454, M456, M458 to calculate the
amount of long U.S. Treasury securities positions of primary
dealers.
---------------------------------------------------------------------------
In calculations involving the depository institution subsidiaries
of holding companies subject to Category I-III standards, the agencies
focus on each holding company's major depository institution
subsidiaries (i.e., the largest depository institution subsidiary as
well as any of its depository institution subsidiaries with total
assets greater than $50 billion at the end of any quarter in 2024). The
rest of their depository institution subsidiaries, with total assets
less than $50 billion in 2024, account for 0.7 percent of the
consolidated total assets of these holding companies, in aggregate.\70\
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\70\ These depository institution subsidiaries include the
uninsured national bank subsidiaries of GSIBs that are subject to
the eSLR standard under the final rule, as discussed in section II.A
of this SUPPLEMENTARY INFORMATION. There are six such uninsured
national bank subsidiaries, which account for 0.01 percent of the
total assets of GSIBs, in aggregate.
---------------------------------------------------------------------------
Table 3 compares the baseline levels of the different tier 1
capital requirements, inclusive of buffer requirements, for banking
organizations subject to Category I-III standards in
[[Page 55265]]
2024.\71\ On average, for GSIBs, the supplementary leverage ratio
requirement is at a similar level to the risk-based tier 1 capital
requirement. On average, for major covered depository institutions, the
supplementary leverage ratio requirement is higher than the risk-based
tier 1 capital requirement. On average, for banking organizations
subject to Category II and III standards, the risk-based tier 1 capital
requirement is higher than the tier 1 leverage ratio requirement, which
in turn is higher than the supplementary leverage ratio requirement.
---------------------------------------------------------------------------
\71\ The agencies calculated tier 1 capital requirements for
banking organizations subject to Category I-III standards as per the
applicable rules. See 12 CFR 3.10 and 3.11, 12 CFR 6.4 (OCC); 12 CFR
208.43, 12 CFR 217.10 and 217.11 (Board); 12 CFR 324.10, 324.11, and
324.403 (FDIC).
[GRAPHIC] [TIFF OMITTED] TR01DE25.013
The agencies estimate that the supplementary leverage ratio
requirement is the highest tier 1 capital requirement for five out of
the eight GSIBs and eight out of the nine major covered depository
institutions under the baseline.\72\ By contrast, for almost all
holding companies subject to Category II and III standards, as well as
for nine out of their 12 major depository institution subsidiaries, the
risk-based tier 1 capital requirement is the highest tier 1 capital
requirement.
---------------------------------------------------------------------------
\72\ One commenter raised questions about the need for adjusting
the eSLR standard for GSIBs predominantly engaged in custody,
safekeeping, and asset servicing activities. The agencies' baseline
calculations show that the supplementary leverage ratio requirement
was often the highest tier 1 capital requirement for these GSIBs and
their covered depository institutions.
---------------------------------------------------------------------------
Table 3 also shows that, compared to the risk-based tier 1
requirement, the relative level of the supplementary leverage ratio
requirement is significantly lower for GSIBs than for their major
covered depository institutions under the baseline. For GSIBs, the
relative level of the supplementary leverage ratio requirement ranges
from 87 to 111 percent of the risk-based tier 1 capital requirement,
whereas for major covered depository institutions, the relative level
of the supplementary leverage ratio requirement ranges from 128 to 244
percent of the risk-based tier 1 capital requirement. This difference
between GSIBs and major covered depository institutions in the level of
the supplementary leverage ratio requirement is due to the lower risk-
based capital buffer requirements and the higher eSLR standard at the
depository institutions.\73\ Therefore, any adjustment to the eSLR
standards that aims for the supplementary leverage ratio requirement to
be a backstop to risk-based capital requirements would lead to a larger
reduction in tier 1 capital requirements for covered depository
institutions than for GSIBs.
---------------------------------------------------------------------------
\73\ Risk-based capital buffer requirements are higher for GSIBs
than for covered depository institutions because of the GSIB
surcharge and the stress capital buffer requirement.
---------------------------------------------------------------------------
The final rule also affects requirements and buffer standards for
TLAC and long-term debt. The agencies present a baseline analysis for
these standards in section IV.I of this SUPPLEMENTARY INFORMATION.
1. Role of Banking Organizations as Investors in U.S. Treasury
Securities
In addition to their critical role as intermediaries in the U.S.
Treasury market, banking organizations also act as investors.
Specifically, in addition to U.S. Treasury securities held as trading
assets, banking organizations also hold such securities as investment
securities on their balance sheets, typically for longer periods, and
sometimes until maturity.\74\ Most of these investment securities are
held by depository institution subsidiaries.\75\
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\74\ Under U.S. Generally Accepted Accounting Principles,
investment securities holdings can be classified as ``available-for-
sale'' or ``held-to-maturity'' securities on banking organizations'
balance sheets.
\75\ See the discussion related to Table 5 in Section IV.B of
this SUPPLEMENTARY INFORMATION.
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Over the last decade, banking organizations have increased their
market share as investors in the U.S. Treasury market, with the growth
of U.S. Treasury securities held by depository institutions outpacing
the expansion of the market. Indeed, Table 4 shows that the amount of
U.S. Treasury securities outstanding has expanded by 125 percent, from
$12.5 trillion to $28.1 trillion, whereas the U.S. Treasury securities
holdings of U.S.
[[Page 55266]]
depository institutions have grown by 264 percent, reaching $1.54
trillion in aggregate. Hence, the aggregate market share of depository
institutions has increased from 3.4 percent to 5.5 percent.
[GRAPHIC] [TIFF OMITTED] TR01DE25.014
Table 4 shows that while the U.S. Treasury securities holdings of
U.S. depository institutions have grown significantly, their balance
sheets have grown at a more moderate pace, by 60 percent, in aggregate,
since 2014. Consequently, the aggregate share of U.S. Treasury
securities held on their balance sheets has more than doubled, from 3.0
percent to 6.8 percent, which indicates that the relative importance of
U.S. Treasury securities as investment assets has increased for banking
organizations over the last decade. These developments contribute to
the increased bindingness of leverage ratio requirements because U.S.
Treasury securities held on the balance sheet of a depository
institution have zero risk weight under the risk-based capital
framework; hence, increases in such securities holdings can increase
leverage ratio requirements relative to risk-based capital
requirements.
2. Treasury Securities Held by Banking Organizations Subject to
Category I to III Standards
---------------------------------------------------------------------------
\76\ In this table, the agencies use publicly available data
reported in the Financial Accounts of the United States (Z.1): field
FL313161105 for the amount of U.S. Treasury securities outstanding;
field FL764194005 for the total assets of U.S. depository
institutions; and field LM763061100 for the U.S. Treasury securities
holdings of U.S. depository institutions, measured at the end of
2014 and 2024.
---------------------------------------------------------------------------
Banking organizations subject to Category I-III standards had large
U.S. Treasury holdings, in both nominal and relative terms, in 2024. As
Table 5 shows, measured at fair value at the consolidated holding
company level, these banking organizations held $1.9 trillion of U.S.
Treasury securities, in aggregate, which was almost 7 percent of the
total amount of U.S. Treasury securities outstanding. On average, these
securities holdings constituted 9 percent of GSIBs' total leverage
exposures and 5 percent of the total leverage exposures of holding
companies subject to Category II and III standards.
[[Page 55267]]
[GRAPHIC] [TIFF OMITTED] TR01DE25.015
Table 5 also shows the two distinct roles of banking organizations
subject to Category I-III standards as both intermediaries and
investors in the U.S. Treasury market. On average across these banking
organizations, about two thirds of U.S. Treasury securities held on
consolidated holding company balance sheets are classified as
investment assets, with the remaining one third classified as trading
assets. In aggregate, the depository institution subsidiaries of these
banking organizations hold the majority of the U.S. Treasury securities
classified as investment assets and a minor share of U.S. Treasury
securities classified as trading assets on the consolidated balance
sheets of their parent holding companies. As noted earlier, most of the
U.S. Treasury holdings classified as trading assets are held by the
broker-dealer subsidiaries of these banking organizations.\77\
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\77\ Using confidential FR 2004 data for GSIBs' primary dealer
subsidiaries, the agencies confirm that, on average, 92 percent of
the U.S. Treasury securities holdings classified as trading assets
on GSIBs' consolidated balance sheets and not held by their
depository institution subsidiaries are indeed held by their primary
dealer subsidiaries. Section IV.B of this SUPPLEMENTARY INFORMATION
describes the data used in this calculation.
---------------------------------------------------------------------------
C. Policy Change
The final rule sets the eSLR buffer standard for GSIBs to 50
percent of their method 1 surcharge, instead of the two percent eSLR
buffer standard applicable under the baseline. Additionally, for
covered depository institutions, the final rule sets the eSLR buffer
standard to 50 percent of their parent GSIB's method 1 surcharge,
capped at one percent. This eSLR buffer standard applies in addition to
the three percent supplementary leverage ratio minimum requirement.
This requirement for covered depository institutions replaces the six
percent ``well-capitalized'' prompt corrective action threshold
applicable under the baseline.
The final rule does not change the three percent supplementary
leverage ratio minimum requirement or the calculation of total leverage
exposure for banking organizations subject to Category I-III standards.
D. Reasonable Alternatives
The analysis considered four reasonable alternatives to the final
rule. The agencies assess the expected benefits and costs of these
alternatives relative to the baseline and compare them to the expected
benefits and costs of the final rule.
Alternative 1 is the ``narrow exclusion'' approach, which includes
all changes for GSIBs and covered depository institutions under the
final rule and additionally excludes from the calculation of total
leverage exposure for holding companies subject to Category I-III
standards U.S. Treasury securities reported as trading assets on the
holding companies' balance sheets and held at broker-dealer
subsidiaries (and foreign equivalents thereof) that are not
subsidiaries of a depository institution.
Alternative 2 is the ``broader exclusion'' approach, which does not
change the eSLR standards like the final rule but instead excludes
deposits held at Federal Reserve Banks (reserves) and all U.S. Treasury
securities holdings from the calculation of total leverage exposure for
all banking organizations subject to Category I-III standards. This
policy alternative is similar to the temporary exclusion of these
assets from the calculation of total leverage exposure implemented by
the agencies in 2020.\78\
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\78\ See the Board's and the agencies' interim final rules
temporarily excluding these assets from the calculation of total
leverage exposure for holding companies subject to Category I-III
standards, as well as their depository institution subsidiaries,
effective April 14, 2020, and June 1, 2020. 85 FR 20578 (Apr. 14,
2020); 85 FR 32980 (June 1, 2020).
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Alternative 3 (``2018 proposal'') sets the eSLR standards for both
GSIBs and covered depository institutions equal to
[[Page 55268]]
50 percent of the higher of method 1 and method 2 surcharges. This
policy alternative is similar to the notice of proposed rulemaking
published in the Federal Register by the Board and OCC on April 19,
2018, which would have recalibrated the eSLR standards for these
banking organizations.\79\ This proposed rule was not finalized.
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\79\ See ``Regulatory Capital Rules: Regulatory Capital,
Enhanced Supplementary Leverage Ratio Standards for U.S. Global
Systemically Important Bank Holding Companies and Certain of Their
Subsidiary Insured Depository Institutions; Total Loss-Absorbing
Capacity Requirements for U.S. Global Systemically Important Bank
Holding Companies.'' 83 FR 17317 (Apr. 19, 2018).
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Alternative 4 (``combined'') is a combination of the final rule and
Alternative 2. As such, this policy alternative both sets the eSLR
standards for GSIBs as well as covered depository institutions like the
final rule and excludes reserves as well as U.S. Treasury securities
holdings from the calculation of total leverage ratio exposure for all
banking organizations subject to Category I-III standards.
E. Changes in the Supplementary Leverage Ratio and Tier 1 Capital
Requirements
The agencies estimate that the final rule will substantially reduce
the supplementary leverage ratio requirement for GSIBs and covered
depository institutions relative to the baseline. As Table 6 shows, the
final rule reduces the requirement by 23 percent, on average, for the
holding companies and by 37 percent for major covered depository
institutions. The final rule does not change the supplementary leverage
ratio requirement for banking organizations subject to Category II and
III standards.
[GRAPHIC] [TIFF OMITTED] TR01DE25.016
Alternative 1 (``narrow exclusion'') has a similar effect to that
of the final rule, reducing the supplementary leverage ratio
requirement slightly more, by 25 percent, on average, for GSIBs and by
the same amount, 37 percent for major covered depository institutions.
Relative to the baseline, this alternative slightly reduces the
supplementary leverage ratio requirement for holding companies subject
to Category II and III standards.\80\ This small incremental reduction
in the supplementary leverage ratio requirement for holding companies
is due to the exclusion of U.S. Treasury securities held by their
broker-dealer subsidiaries from the calculation of total leverage
exposure for these holding companies.\81\
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\80\ Under Alternative 1, the estimated reduction in the
supplementary leverage ratio requirement for holding companies
subject to Category II and III is modest because it is solely driven
by the exclusion of U.S. Treasury securities held by their broker-
dealer subsidiaries from the calculation of total leverage exposure
for these holding companies, while their minimum supplementary
leverage ratio requirement remains unchanged.
\81\ Throughout the economic analysis, for each holding company
subject to Category I to III standards, the agencies approximate the
amount of U.S. Treasury securities classified as trading assets and
held by its broker-dealer subsidiaries by taking the amount of U.S.
Treasury securities reported as trading assets by the consolidated
holding company and subtracting the amount of U.S. Treasury
securities reported as trading assets by its depository institution
subsidiaries.
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Alternative 2 (``broader exclusion'') leads to a much smaller
reduction in the supplementary leverage ratio requirement for GSIBs and
covered depository institutions than the final rule. This policy
alternative affects GSIBs and banking organizations subject
[[Page 55269]]
to Category II and III standards to a similar extent because it
excludes reserves and all U.S. Treasury securities holdings from the
calculation of total leverage exposure for all of these banking
organizations. Specifically, this alternative reduces the supplementary
leverage ratio requirement for these banking organizations by 14
percent, on average. The reduction in the requirement is similar
between holding companies and depository institution subsidiaries
because most of the excluded assets are held at the depository
institution subsidiaries.
Alternative 3 (``2018 proposal'') leads to a smaller reduction in
the supplementary leverage ratio requirement for GSIBs and covered
depository institutions than the final rule. This is because this
policy alternative sets the eSLR standards to 50 percent of the higher
of the method 1 and method 2 surcharges. Specifically, Alternative 3
reduces the supplementary leverage ratio requirement by 8 percent, on
average, for GSIBs and by 23 percent, on average, for major covered
depository institutions. Like the final rule, this alternative leads to
a much larger reduction in the supplementary leverage ratio requirement
for the depository institutions than for the holding companies because,
as described in section IV.D of this SUPPLEMENTARY INFORMATION, it sets
eSLR standards to the same percentage amount for both GSIBs and their
major depository institution subsidiaries, whereas the eSLR standard is
one percentage point higher for covered depository institutions under
the baseline. Like the final rule, this alternative does not change the
supplementary leverage ratio requirement for banking organizations
subject to Category II and III standards.
Alternative 4 (``combined'') combines the effects of the final rule
and the ``broader exclusion'' alternative, reducing the supplementary
leverage ratio requirement by 35 percent and 46 percent, on average,
for GSIBs and major covered depository institutions, respectively, and
by a little more than 10 percent, on average, for banking organizations
subject to Category II and III standards.\82\ Similar to the ``narrow
exclusion'' alternative, the ``combined'' alternative reduces tier 1
capital requirements for GSIBs and covered depository institutions much
more than for banking organizations subject to Category II and III
standards. This greater reduction is due to GSIBs and covered
depository institutions being affected by both the reduced calibration
of the eSLR standards and the exclusion of reserves and U.S. Treasury
securities holdings from the calculation of total leverage exposure,
whereas banking organizations subject to Category II and III standards
are only affected by the exclusion.
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\82\ The effect of Alternative 4 is less than the sum of the
final rule's effect and the effect of Alternative 2 because the
exclusion of reserves and U.S. Treasury securities holdings from the
supplementary leverage ratio's denominator reduces the effect of the
reduced calibration of the eSLR standards under this combined policy
alternative.
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The final rule will meaningfully reduce the supplementary leverage
ratio requirement relative to the risk-based tier 1 capital
requirements for GSIBs and covered depository institutions, thereby
achieving the goal of making the supplementary leverage ratio
requirement a backstop for these banking organizations. As Table 7
shows, the final rule will reduce the relative level of the
supplementary leverage ratio requirement from about 100 percent and 155
percent of the risk-based tier 1 capital requirement to about 75
percent and 100 percent of it, on average, for GSIBs and major covered
depository institutions, respectively. Under the final rule, the level
of the supplementary leverage ratio requirement will range from 61
percent to 86 percent of the risk-based tier 1 requirement for GSIBs
and from 75 percent to 143 percent of the risk-based tier 1 requirement
for major covered depository institutions. Therefore, the final rule
sets the supplementary leverage ratio requirement below the level of
the risk-based tier 1 capital requirement for all GSIBs, making it a
backstop to risk-based tier 1 capital requirements. The final rule also
sets the level of the supplementary leverage ratio requirement below
the level of the risk-based tier 1 capital requirement for six out of
the nine major covered depository institutions. The final rule does not
change the supplementary leverage ratio requirement for banking
organizations subject to Category II and III standards. The
supplementary leverage ratio requirement is already well below (about
65 percent of) the risk-based tier 1 capital requirement for these
banking organizations under the baseline.
[[Page 55270]]
[GRAPHIC] [TIFF OMITTED] TR01DE25.017
The estimated changes in the relative level of the supplementary
leverage ratio requirement under the policy alternatives are consistent
with the estimated percentage changes in the supplementary leverage
ratio requirement discussed earlier. The effect of Alternative 1
(``narrow exclusion'') is similar to that of the final rule.
Alternative 2 (``broader exclusion'') reduces the relative level of the
leverage ratio requirement for GSIBs and covered depository
institutions by less than the final rule. For banking organizations
subject to Category II and III standards, the reduction is larger than
under the final rule. Alternative 3 (``2018 proposal'') reduces the
relative level of the leverage ratio requirement less for GSIBs and
covered depository institutions than the final rule. Notably, under
Alternatives 2 and 3, the supplementary leverage ratio requirement
remains above the risk-based tier 1 capital requirement for some GSIBs.
Alternative 4 reduces the relative level of the leverage ratio
requirement the most of all policy alternatives. The supplementary
leverage ratio requirement still exceeds the risk-based tier 1 capital
requirement for one major covered depository institution under this
alternative.
Turning to changes in tier 1 capital requirements, the agencies
estimate that the final rule will reduce tier 1 capital requirements
for most GSIBs and covered depository institutions. Table 8 shows that
the estimated aggregate reduction in tier 1 capital requirement under
the final rule is $13 billion for GSIBs and $219 billion for major
covered depository institutions. For GSIBs, the estimated reduction in
tier 1 capital requirement relative to the baseline is small, less than
2 percent, in aggregate. This is because the baseline levels of the
supplementary leverage ratio requirement and the risk-based tier 1
capital requirement, expressed in dollar terms, are similar for GSIBs,
and thus lowering the supplementary leverage ratio requirement reduces
the tier 1 capital requirement only up to the point that other tier 1
capital requirements become binding.\83\ By contrast, for major covered
depository institutions, the estimated reduction in tier 1 capital
requirement relative to the baseline is sizable, about 28 percent, in
aggregate. This is because, for these depository institutions, the
baseline level of the supplementary leverage ratio requirement, in
dollar terms, is significantly higher than the baseline levels of the
other tier 1 capital requirements.
---------------------------------------------------------------------------
\83\ More precisely, lowering the supplementary leverage ratio
requirement reduces the tier 1 capital requirement only up to the
point that the risk-based tier 1 capital requirement or the tier 1
leverage ratio requirement becomes the binding tier 1 capital
requirement. One commenter requested more information regarding the
relative bindingness of the tier 1 leverage ratio requirement
compared to other tier 1 capital requirements. Under the baseline,
the risk-based tier 1 capital requirement exceeds the tier 1
leverage ratio requirement for all except one GSIB.
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[[Page 55271]]
[GRAPHIC] [TIFF OMITTED] TR01DE25.018
Alternatives 1, 2, and 4 lead to the same reduction in the tier 1
capital requirement for GSIBs as the final rule because all of these
policy alternatives reduce the supplementary leverage ratio requirement
below the other (risk-based and leverage) tier 1 capital requirements
for all GSIBs. By contrast, Alternative 3 leads to a small, less than
$2 billion, aggregate increase in the tier 1 capital requirement for
GSIBs, as one GSIB faces an increase in its tier 1 capital requirement
under this policy alternative.
For major covered depository institutions, the estimated dollar
reduction in tier 1 capital requirements is in line with the estimated
percentage reduction in the supplementary leverage ratio requirement
across policy alternatives, with the exception of Alternative 4.
Specifically, even though this alternative combines the effects of the
final rule and the ``broader exclusion'' alternative, the estimated
aggregate reduction in tier 1 capital requirement under Alternative 4
is the same as the reduction under the final rule. This is because the
final rule already sets the supplementary leverage ratio requirement
for all major covered depository institutions below at least one of the
other (risk-based and leverage) tier 1 capital requirements, and
therefore the additional effect of excluding assets from the
calculation of total leverage exposures under the ``combined''
alternative for these depository institutions does not lead to a
further reduction in their tier 1 capital requirements.
Similar to the final rule, the policy alternatives considered do
not reduce the tier 1 capital requirements for banking organizations
subject to Category II and III standards because the supplementary
leverage ratio requirement is not the binding tier 1 capital
requirement for these banking organizations under the baseline.
For major covered depository institutions, the final rule's
estimated impact is slightly different from the proposal's estimated
impact.\84\ This small change is due to the difference in the eSLR
standard for covered depository institutions under the final rule and
the proposal. In particular, as explained in section II.A of this
SUPPLEMENTARY INFORMATION, the proposal would have set the eSLR
standard for covered depository institutions equal to 50 percent of
their parent GSIB's method 1 surcharge, whereas the final rule sets the
eSLR standard for covered depository institutions equal to 50 percent
of their parent GSIB's method 1 surcharge, capped at one percent. Even
though this change relative to the proposal does not meaningfully
change the estimated aggregate impact on tier 1 capital requirements
and the related economic implications, it leads to a somewhat lower
supplementary leverage ratio requirement for some covered
[[Page 55272]]
depository institutions whose parent GSIBs have method 1 surcharges
above two percent. Nevertheless, this change does not affect the
estimated reduction in the tier 1 capital requirements for most of
these depository institutions because both the proposal and the final
rule achieve the objective of setting the supplementary leverage ratio
requirement as a backstop for these depository institutions, as other
(risk-based and leverage) tier 1 capital requirements become binding.
---------------------------------------------------------------------------
\84\ The estimated aggregate reduction in the tier 1 capital
requirement for these covered depository institutions was $213
billion under the proposal and is $219 billion under the final rule.
---------------------------------------------------------------------------
One commenter requested that the agencies provide public, reliable
data supporting the estimated aggregate reduction in the tier 1 capital
requirements of GSIBs and covered depository institutions,
respectively. As discussed in section IV.B of this SUPPLEMENTARY
INFORMATION, the agencies use publicly available data reported in FR Y-
9C and FFIEC Call Report filings in their calculations. The section
also describes how the agencies use these data to calculate their
impact estimates, with the relevant data fields specified in the
corresponding footnotes.
Notably, the estimated changes in tier 1 capital requirements
discussed above in Table 8 do not reflect potential short-run
transition effects due to risk-based total capital requirements. So
far, the analysis has only considered the risk-based tier 1 capital
requirements, the tier 1 leverage ratio requirement, and the
supplementary leverage ratio requirement. However, banking
organizations also have to meet risk-based total capital requirements,
where total capital comprises tier 1 and tier 2 capital, which includes
a limited allowance for credit losses on loans and leases as well as
subordinated debt. Therefore, if the baseline tier 2 capital amounts
($76 billion, in aggregate) of covered depository institutions remain
unchanged in the short run, they would likely continue to use their
existing tier 1 capital amounts to satisfy the rest of their total
capital requirements. Taking this effect into account, the agencies
estimate that the aggregate reduction in tier 1 requirements for
covered depository institutions would be $197 billion. However, over
time, or in anticipation of the policy change, these depository
institutions could increase their tier 2 capital such that the
aggregate reduction in their tier 1 capital requirements would be
closer to the $219 billion estimate in Table 8.
Up to this point, the analysis has focused on the major depository
institution subsidiaries of holding companies subject to Category I-III
standards. The rest of the insured depository institution subsidiaries
of holding companies subject to Category I-III standards account for
0.7 percent of the consolidated total assets of these holding
companies, in aggregate. These smaller subsidiaries will slightly add
to the aggregate reduction in the supplementary leverage ratio and the
tier 1 capital requirements estimated above.
Finally, the final rule will impose an enhanced supplementary
leverage ratio requirement on the uninsured national bank subsidiaries
of GSIBs. As noted in section IV.B of this SUPPLEMENTARY INFORMATION,
there are six such subsidiaries, which account for 0.01 percent of the
consolidated total assets of GSIBs, in aggregate. Under the baseline,
these small subsidiaries have a supplementary leverage ratio above 90
percent, on average, well in excess of the requirement that they will
be subject to under the final rule. Hence, the agencies expect that the
final rule will generally have little impact on the uninsured national
bank subsidiaries of GSIBs.
F. Benefits
The agencies expect that the reduced calibration of the eSLR
standards for GSIBs and covered depository institutions under the final
rule will have two main economic benefits: (1) it will reduce
unintended disincentives for these banking organizations to engage in
low-risk activities as well as unintended incentives to engage in
higher-risk activities; and (2) it could enhance the functioning of
financial markets, including the U.S. Treasury market, by creating
additional capacity for GSIBs to engage in market intermediation. In
the rest of this section, the agencies discuss these benefits in more
detail.
The first benefit is due to the significant reduction in the
supplementary leverage ratio requirement for these banking
organizations under the final rule, estimated in section IV.E, which
has both a level effect and a marginal effect, as discussed in section
IV.A of this SUPPLEMENTARY INFORMATION. The level effect manifests
because the reduced calibration of the eSLR standards will enable these
banking organizations to substantially increase low-risk asset holdings
without raising their tier 1 capital requirements. The marginal effect
manifests as the final rule sets the supplementary leverage ratio
requirement, in dollar terms, below risk-based tier 1 capital
requirements for all GSIBs and most covered depository institutions. By
doing so, the final rule will make the binding tier 1 capital
requirement for these banking organizations more risk sensitive because
risk-based requirements are more closely aligned with the underlying
risks of different asset classes. In particular, under the final rule,
increasing low-risk-weight activities will not lead to a significant
increase in tier 1 capital requirements for these banking
organizations, because the risk-based tier 1 capital requirement will
be their binding tier 1 capital requirement. Moreover, this marginal
effect will reduce unintended incentives for these banking
organizations to engage excessively in higher-risk activities because
such activities are required to be backed by more tier 1 capital under
the risk-based capital framework than under the supplementary leverage
ratio requirement.\85\
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\85\ For example, for each dollar of an asset with 100 percent
risk weight, GSIBs are required to maintain 5 cents of tier 1
capital under the baseline supplementary leverage ratio requirement
and, on average, 12.3 cents of tier 1 capital under the risk-based
capital framework.
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Similar to the final rule, the ``narrow exclusion'' Alternative 1
and the ``combined'' Alternative 4 reduce these unintended marginal
incentives for GSIBs and covered depository institutions. By contrast,
this economic benefit does not fully manifest under the ``broader
exclusion'' Alternative 2 and the ``2018 proposal'' Alternative 3, as
the supplementary leverage ratio requirement remains above the risk-
based tier 1 capital requirement for one GSIB under ``the 2018
proposal'' alternative and for most covered depository institutions
under both alternatives. However, the ``broader exclusion'' alternative
still reduces unintended marginal incentives for these banking
organizations to hold reserves and U.S. Treasury securities, as this
alternative excludes such assets from the calculation of total leverage
exposure.
The level effect of the final rule will enable these banking
organizations to add certain low-risk assets to their balance sheets
without increasing their tier 1 capital requirements as long as their
leverage-based tier 1 capital requirements remain below their risk-
based tier 1 capital requirements.\86\ The agencies do not predict the
type and dollar amount of low-risk assets that banking organizations
subject to Category I-III standards may add to their balance sheets
under the final rule and the policy alternatives considered
[[Page 55273]]
because such predictions are both highly uncertain and depend on
various macroeconomic factors, such as the market and economic
environment. However, the agencies provide a simple measure for the
potential magnitude of this effect by estimating the available capacity
of GSIBs to increase reserves or U.S. Treasury securities held as
investment securities at covered depository institutions and assessing
how the final rule will increase this capacity estimate.\87\
Specifically, for each GSIB, the agencies define ``available capacity''
as the dollar amount of such assets that its depository institution
subsidiaries can add to their balance sheets without raising their or
their consolidated holding company's tier 1 capital requirements above
baseline levels.\88\ For a comprehensive assessment of the policy
alternatives considered, the agencies also estimate this available
capacity for holding companies subject to Category II and III
standards. Additionally, further below in this subsection, the agencies
also estimate GSIBs' available capacity to hold U.S. Treasury
securities at their broker-dealer subsidiaries, which is more closely
tied to U.S. Treasury market intermediation.
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\86\ In particular, banking organizations will be able to
increase their asset holdings that do not increase their total risk
weighted assets. Such asset holdings include reserves, U.S. Treasury
securities, and Ginnie Mae mortgage-backed securities held as
investment securities.
\87\ Notably, the agencies use this capacity estimate to
illustrate the magnitude of the final rule's effect on the ability
of banking organizations to hold additional low-risk assets. The
capacity estimates are not meant to suggest how or to what extent
any additional capacity may be used.
\88\ Reserves and U.S. Treasury securities held as investment
securities have a zero percent risk weight under the risk-based
capital framework. Accordingly, the agencies estimate the capacity
of holding companies to increase such asset holdings at their
depository institution subsidiaries by calculating how this would
increase supplementary leverage ratio and tier 1 leverage ratio
requirements for both the depository institutions and their
consolidated holdings companies. The calculation also incorporates
the effect on the ``size'' systemic indicator, which could lead to
higher method 1 and method 2 surcharges, which in turn could
increase risk-based tier 1 capital requirements for GSIBs. This
methodology is consistent with one commenter's suggestion that the
agencies also consider the effect of increasing U.S. Treasury
securities holdings on GSIB surcharges. In particular, due to this
GSIB surcharge element in the calculation, the capacity estimate is
zero for GSIBs with binding risk-based tier 1 capital requirements.
Section IV.K.1 of this SUPPLEMENTARY INFORMATION describes the
capacity estimation in detail.
---------------------------------------------------------------------------
Table 9 compares the aggregate estimated amounts of the available
capacity of GSIBs and holding companies subject to Category II and III
standards for reserves and U.S. Treasury securities held as investment
securities at their depository institution subsidiaries under the
baseline, the final rule, and the policy alternatives considered. Under
the final rule, the agencies estimate that GSIBs' available capacity
for such assets will increase from nearly zero to $1.1 trillion, in
aggregate, which is about 6 percent of their aggregate total leverage
exposures or about the size of their aggregate U.S. Treasury securities
held as investment securities under the baseline.\89\ Under both the
final rule and the policy alternatives considered, the primary limiting
factors to the estimated increase in GSIBs' available capacity are the
effect of increasing reserves or U.S. Treasury securities holdings on
their GSIB surcharge and on the tier 1 leverage ratio requirements of
their depository institution subsidiaries.
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\89\ The estimate for GSIBs' available capacity is close to zero
under the baseline because the supplementary leverage ratio
requirement is the binding tier 1 capital requirement for most GSIBs
and covered depository institutions.
[GRAPHIC] [TIFF OMITTED] TR01DE25.019
Alternative 1 (``narrow exclusion'') leads to a similar estimated
increase in GSIBs' available capacity for reserves and U.S. Treasury
securities held as investment securities at their depository
institution subsidiaries as the final rule, consistent with the similar
quantitative effect of this alternative on the supplementary leverage
ratio
[[Page 55274]]
requirement. The agencies estimate that, of all the alternatives
considered, the ``broader exclusion'' and the ``combined'' alternatives
lead to the largest estimated increase in GSIBs' available capacity for
such assets. The estimated increase is $1.4 trillion, in aggregate,
which is about 8 percent of their aggregate total leverage exposures or
about 125 percent of their aggregate U.S. Treasury securities held as
investment securities under the baseline. This is because these
alternatives exclude reserves and all U.S. Treasury securities holdings
from the calculation of total leverage exposure.\90\
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\90\ Notably, under the ``broader exclusion'' and the
``combined'' alternatives, increases in reserves or U.S. Treasury
securities holdings increase tier 1 leverage ratio requirements, as
well as GSIB method 1 and method 2 scores, which limits the
respective available capacity estimates.
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Of the policy alternatives considered, Alternative 3 (``2018
proposal'') leads to the least estimated increase in GSIBs' available
capacity for such assets. The estimated increase is $0.2 trillion, in
aggregate, which is less than 1 percent of their aggregate total
leverage exposures under the baseline. This is because this policy
alternative reduces the calibration of the eSLR standards for GSIBs and
their depository institution subsidiaries less than the final rule.
Finally, the alternatives considered do not meaningfully increase the
available capacity of holding companies subject to Category II and III
standards for reserves and U.S. Treasury securities held as investment
securities at their depository institution subsidiaries. However, these
banking organizations have ample available capacity (14 percent of
their total leverage exposures, in aggregate) for such zero-risk-weight
assets at their depository institution subsidiaries under the baseline
because leverage-based requirements are not the highest tier 1 capital
requirements for most of these banking organizations.
One commenter queried why the U.S. banking system, financial
markets, and economy would benefit from removing potential
disincentives for GSIBs to hold more low-risk assets. Because GSIBs are
key participants in critical financial markets, such as the money
market, the U.S. Treasury market, and the agency-backed mortgage
securities market, their reluctance to hold low-risk assets transacted
in these markets and to act as counterparties and intermediaries could
have negative implications for the functioning, liquidity, and
stability of these markets.\91\ Additionally, by creating significant
additional capacity for GSIBs and covered depository institutions to
hold low-risk assets, the final rule will enhance the ability of these
banking organizations to absorb surges in the demand for their services
and liquidity provision, especially during stress periods. These
positive changes due to the final rule can have broader economic
benefits, including improving the stability of financial markets and
the financial system, as well as facilitating the effective
intermediation of monetary policy to businesses and households.
---------------------------------------------------------------------------
\91\ Also see the discussion in Section IV.A in this
SUPPLEMENTARY INFORMATION.
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Beyond reducing disincentives to holding low-risk assets in
general, the final rule could improve GSIBs' ability to perform their
role as key intermediaries in the U.S. Treasury market, through the
marginal and level effects discussed above. In particular, the marginal
effect can reduce the amount of tier 1 capital required per each dollar
of U.S. Treasury securities held by GSIBs' primary dealer subsidiaries.
This is because, under the final rule, the risk-based tier 1 capital
requirement will be the binding tier 1 capital requirement for all
GSIBs with primary dealer subsidiaries, and the amount of tier 1
capital that GSIBs are required to have against the U.S. Treasury
securities holdings of their broker-dealer subsidiaries can be lower
under the risk-based capital framework than under the supplementary
leverage ratio requirement.\92\ A reduction in GSIBs' marginal tier 1
capital requirement would lower the marginal funding cost of holding
U.S. Treasury securities in their primary dealer subsidiaries, which
could reduce potential disincentives for these primary dealers to
engage in U.S. Treasury market intermediation and improve their
competitiveness as intermediaries in this market.
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\92\ Under the market risk capital framework, the risk-based
tier 1 capital requirement for the U.S. Treasury securities holdings
of GSIBs' broker-dealer subsidiaries can be lower than the tier 1
capital requirement under the supplementary leverage ratio
requirement if such securities holdings are sufficiently hedged. As
U.S. Treasury market intermediation inherently involves providing
liquidity to both buyers and sellers in the market and thus taking
opposing (that is, long and short) positions, the net market risk
exposures of such positions are likely small.
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In addition to the marginal effect, the level effect of the final
rule will enable GSIBs to increase their market intermediation
activities more flexibly in response to short- and long-run changes in
market participants' demand for liquidity. The level effect manifests
as the final rule reduces the calibration of the eSLR standard for
GSIBs, thereby increasing the capacity of their broker-dealer
subsidiaries to hold additional U.S. Treasury securities without
raising the tier 1 capital requirements of GSIBs above baseline levels.
The agencies provide a simple measure for the magnitude of this effect
under the final rule and the policy alternatives considered by
estimating the available capacity of GSIBs to increase U.S. Treasury
securities held at their broker-dealer subsidiaries and assess how the
final rule will increase this capacity estimate. Specifically, for each
GSIB, the agencies define ``available capacity'' as the dollar amount
of U.S. Treasury securities that their broker-dealer institution
subsidiaries could add to their balance sheets without raising their
consolidated holding company's tier 1 capital requirements above
baseline levels, assuming that such securities holdings are perfectly
hedged.\93\ Notably, the capacity estimates would be meaningfully lower
if the securities holdings are not fully hedged.\94\ For a
comprehensive assessment of the policy alternatives, the agencies also
estimate this available capacity for holding companies subject to
Category II and III standards.
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\93\ Even though U.S. Treasury securities generally have zero
risk weight under the risk-based capital framework, increasing U.S.
Treasury securities held at broker-dealer subsidiaries can increase
the risk-weighted asset amounts of their consolidated holding
companies because such securities holdings are classified as trading
assets, which are subject to market risk capital requirements.
However, as explained in the previous footnote, if such U.S.
Treasury securities are perfectly hedged, then they do not add to
risk-weighted asset amounts. With the understanding that much of
broker-dealers' securities holdings related to market intermediation
are hedged, the agencies create a simple estimate for the capacity
of holding companies for such assets by assuming that they would be
perfectly hedged. Hence, in the calculation, the agencies consider
how increasing U.S. Treasury securities holdings at broker-dealer
subsidiaries would increase the supplementary leverage ratio and
tier 1 leverage ratio requirements for their consolidated holdings
companies. The calculation incorporates the related effect on method
1 and method 2 surcharges, increasing because of the increase in
``size'' systemic indicators, which in turn would increase risk-
based tier 1 capital requirements for GSIBs. Section IV.K.2 of this
SUPPLEMENTARY INFORMATION describes the capacity estimation in
detail.
\94\ The estimates for available capacity would be meaningfully
lower for U.S. Treasury securities that are not fully hedged because
increasing such securities holdings on broker-dealers' balance
sheets can increase the risk-weighted asset amounts for consolidated
holding companies, thereby raising their risk-based capital
requirements. This effect would reduce the capacity estimates
because risk-based tier 1 capital requirements are either the
binding tier 1 capital requirement or lie closely below the binding
tier 1 capital requirement for GSIBs under the baseline.
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Table 10 compares the aggregate estimated amounts of the available
capacity of GSIBs and holding companies subject to Category II and III
standards for U.S. Treasury securities held at their broker-dealer
subsidiaries
[[Page 55275]]
under the baseline, the final rule, and the policy alternatives. Under
the final rule, the agencies estimate that the available capacity of
GSIBs' broker-dealers to hold U.S. Treasury securities will increase
from nearly zero to $2.1 trillion, in aggregate, which is about 12
percent of GSIBs' aggregate total leverage exposures or about 350
percent of GSIBs' aggregate U.S. Treasury securities reported as
trading assets under the baseline. Under both the final rule and the
policy alternatives, the primary limiting factor to the estimated
increase in the available capacity of GSIBs' broker-dealers is the
effect of increasing U.S. Treasury securities holdings on the GSIB
surcharge and the tier 1 leverage ratio requirement of their
consolidated holding companies. The capacity estimates in Table 10 are
about twice as much as the capacity estimates for reserves and U.S.
Treasury securities held at covered depository institutions, shown in
Table 9, because the latter estimates also take into account leverage-
based capital requirements at covered depository institutions.
[GRAPHIC] [TIFF OMITTED] TR01DE25.020
Alternatives 1, 2, and 4 (``exclusion'' alternatives) lead to a
larger estimated increase in the available capacity of GSIBs' broker-
dealers for U.S. Treasury securities than the final rule. The estimated
increase is $2.5 trillion, in aggregate, which is about 14 percent of
GSIBs' aggregate total leverage exposures or about 420 percent of
GSIBs' aggregate U.S. Treasury securities reported as trading assets
under the baseline. The estimated increase in available capacity is
larger because all of these policy alternatives exclude U.S. Treasury
securities held at broker-dealer subsidiaries from the calculation of
total leverage exposure for both GSIBs and holding companies subject to
Category II and III standards. Therefore, beyond meaningfully reducing
the likelihood that the supplementary leverage ratio requirement
becomes a binding tier 1 capital requirement for these holding
companies, these alternatives could further mitigate potential
constraints to their U.S. Treasury market intermediation activities, in
the event that the supplementary leverage ratio requirement does become
binding in the future.
Of the policy alternatives considered, Alternative 3 (``2018
proposal'') leads to the least estimated increase in the available
capacity of GSIBs' broker-dealers for U.S. Treasury securities. The
estimated increase is $0.2 trillion in aggregate, which is less than 1
percent of their aggregate total leverage exposures under the baseline.
Finally, the alternatives considered do not meaningfully increase the
available capacity of holding companies subject to Category II and III
standards for U.S. Treasury securities held at their broker-dealer
subsidiaries. However, these banking organizations already have ample
available capacity (47 percent of their total leverage exposures, in
aggregate) for such asset holdings under the baseline because leverage
ratio requirements are not the highest tier 1 capital requirements for
most of these organizations.
By facilitating the U.S. Treasury market intermediation activity of
GSIBs' broker-dealers, the final rule and the ``exclusion''
alternatives could improve the functioning of this market, in both
normal and stressed times. This is because, as discussed in section
IV.A of this SUPPLEMENTARY INFORMATION, these large broker-dealers play
a central role in the U.S. Treasury market, and constraints to their
capacity to act as intermediaries can affect market liquidity. U.S.
Treasury market liquidity is important because it supports the market's
critical economic functions. Indeed, as Goldberg (2020) shows,
decreases in liquidity supplied by dealers in U.S. Treasury markets are
[[Page 55276]]
related to declines in the liquidity of corporate bonds and other asset
classes, which in turn are associated with declines in debt issuance
and investment by non-financial firms, with potential real economic
repercussions.\95\ More broadly, by reducing regulatory constraints for
broker-dealer subsidiaries of GSIBs, the final rule and the
``exclusion'' alternatives could support these entities in providing
liquidity (for example, in the form of securities financing
transactions) to other market participants, which could in turn reduce
the propagation of liquidity shocks across financial markets and thus
prevent or mitigate ``liquidity spirals,'' discussed in Brunnermeier
and Pedersen (2009).\96\ Notably, this economic benefit is stronger
under the ``exclusion'' alternatives because these policy alternatives
exclude the U.S. Treasury securities holdings of broker-dealer
subsidiaries from the calculation of total leverage exposure for their
consolidated holding companies. This exclusion could further enhance
the ability of banking organizations subject to Category I to III
standards to flexibly adjust their U.S. Treasury market intermediation
activities in response to short- and long-run changes in market
participants' demand for liquidity.
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\95\ J. Goldberg, Liquidity Supply by Broker-Dealers and Real
Activity, Journal of Financial Economics, 136(3) (Apr. 14, 2020)
(``Goldberg (2020)'').
\96\ M.K. Brunnermeier and L.H. Pedersen, Market Liquidity and
Funding Liquidity, The Review of Financial Studies, 22(6) (June
2009) (``Brunnermeier and Pedersen (2009)'').
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Several commenters requested evidence that the proposal would
facilitate trading in U.S. Treasury securities, in both normal and
stressed times, by reducing the eSLR standard. As discussed in this
subsection, the agencies anticipate that the final rule will reduce
unintended disincentives for GSIBs to participate in U.S. Treasury
markets due to binding supplementary leverage ratio requirements
through its marginal and level effects.\97\ In particular, as estimated
in Table 10, the level effect of the final rule will create significant
additional capacity for GSIBs' broker-dealers to hold U.S. Treasury
securities and intermediate in this market. The agencies assess that
this benefit will manifest in both normal and stressed times, as the
additional capacity is large enough to enable GSIBs' broker-dealers to
absorb even major fluctuations in the demand for liquidity by other
market participants. In section IV.A of this SUPPLEMENTARY INFORMATION,
the agencies cite multiple pieces of evidence from the academic
literature suggesting that balance sheet constraints could indeed
reduce broker-dealers' ability and willingness to participate in the
U.S. Treasury market. Specifically, the empirical studies of Favara,
Infante, Rezende (2022), Duffie et al. (2023), and Br[auml]uning and
Stein (2024) examine the negative relationship between primary dealer
balance sheet constraints and their U.S. Treasury market participation.
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\97\ Notably, U.S. Treasury market participation is just one
example for low-risk, low-return activities that could be
constrained by a binding supplementary leverage ratio requirement.
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One commenter requested a quantitative assessment of the proposal's
positive impact on broker-dealer intermediation, bid-ask spreads,
market depth, trade size, and trading volume in the U.S. Treasury
market. This subsection of the economic analysis provides multiple
quantitative estimates for the additional capacity of GSIBs and their
subsidiaries for holding additional U.S. Treasury securities. The
estimates indicate that the additional capacity will be significant
relative to the baseline total leverage exposures of these banking
organizations. Although it is challenging to predict with sufficient
accuracy to what extent GSIBs and their subsidiaries will use this
additional capacity, the estimates indicate that the final rule will
greatly alleviate the balance sheet constraints on the U.S. Treasury
market participation of GSIBs' broker-dealers due to potentially
binding supplementary leverage ratio requirements. The empirical
studies cited above suggest that relaxing primary dealers' balance
sheet constraints can improve the liquidity of the U.S. Treasury
markets in various dimensions, including the liquidity metrics
mentioned by the commenter.
The agencies present the anticipated benefits of the changes to
TLAC and long-term debt requirements and buffer standards under the
final rule in section IV.I of this SUPPLEMENTARY INFORMATION.
G. Costs
The economic costs of the final rule and the policy alternatives
considered can be attributed to three main factors: (1) a potential
increase in the leverage of GSIBs and covered depository institutions
due to the reduction in their tier 1 capital requirements; (2) a
potential increase in the costs associated with the failure of insured
covered depository institutions; and (3) a potential increase in risk
exposures not fully captured by the risk-based capital framework. In
the rest of this section, the agencies discuss these potential costs in
more detail. The agencies anticipate that the economic costs resulting
from the final rule and the policy alternatives for banking
organizations subject to Category II and III standards will be
negligible because tier 1 capital requirements for these organizations
will remain essentially unchanged.
The agencies anticipate that the final rule, through the reduction
in the supplementary leverage ratio and tier 1 capital requirements for
GSIBs, will enable GSIBs to increase their leverage by increasing the
share of debt financing on their balance sheets. Even though the
aggregate reduction in their tier 1 capital requirement will be small,
and GSIBs will be required to retain most of their existing tier 1
capital, the aggregate reduction in their supplementary leverage ratio
requirement will be significant (23 percent), which will enable GSIBs
to increase their leverage in two likely ways. First, their increased
capacity for low-risk assets will enable GSIBs to expand their balance
sheets by increasing such asset holdings, financing them with new debt,
such as deposits.\98\ Such potential balance sheet growth could reduce
the risk-weighted asset densities of GSIBs, which would be consistent
with the observed growth of these companies and the gradual decline in
their risk-weighted asset densities over the past decade.\99\ Second,
GSIBs could also distribute some of their equity capital to external
shareholders and replace it with new debt, while keeping the size of
their balance sheets, as well as their tier 1 capital management
buffers, unchanged relative to the baseline.\100\ A potential increase
in leverage could render GSIBs riskier because the economic value of
their equity capital would become more sensitive to asset value shocks
and therefore more volatile. However, in the case that GSIBs grow by
adding more low-risk assets, the effect of increased leverage on equity
volatility would be mitigated by the relative stability in the values
of the newly added low-risk assets. Therefore, the agencies expect
[[Page 55277]]
that the economic costs due to potential changes in GSIBs' balance
sheets would be small under the final rule.
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\98\ More specifically, through reducing the tier 1 capital
requirement for GSIBs, the final rule will create room for GSIBs to
increase any asset holdings on their balance sheets, not just the
ones with low risk weights. However, because risk-based tier 1
capital requirements will become the binding tier 1 capital
requirement for most GSIBs under the final rule, and the reduction
in their tier 1 capital requirement will be small, GSIBs will have
limited additional capacity to increase asset holdings with higher
risk weights.
\99\ Risk-weighted asset density, expressed as a percentage, is
the ratio of risk-weighted assets to total assets multiplied by 100.
From 2015 to 2024, the aggregate total consolidated assets of GSIBs
grew by almost 50 percent, from $10.5 trillion to $15.5 trillion,
while their average risk-weighted asset density declined from 58
percent to about 45 percent.
\100\ GSIBs' ability to distribute their equity capital to
external shareholders is also limited by common equity tier 1
capital requirements.
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Several commenters raised concerns about the potential increase in
the leverage of GSIBs and a related potential increase in their
probability of failure. The agencies anticipate that such potential
increase in GSIBs' probability of failure will be minimal, mainly
because the aggregate reduction in their tier 1 capital requirements is
small. The final rule also does not change common equity tier 1 capital
requirements, standardized liquidity requirements, or other enhanced
prudential standards applicable to GSIBs, which further help ensure
that GSIBs operate in a safe and sound manner.\101\
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\101\ See, e.g., 12 CFR part 217; 12 CFR part 249; 12 CFR part
252.
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Several commenters expressed concerns about the potential increase
in GSIBs' capital distributions under the proposal, with one commenter
requesting upper and lower bounds for the estimated change in capital
distributions. Another commenter argued that elevated capital
distributions of GSIBs in normal times could lead to their increased
need for and reliance on government support during times of stress. One
commenter requested that the agencies assess the financial stability
implications of a potential increase in GSIBs' capital distributions.
The agencies expect that the final rule will likely not lead to a
material increase in GSIBs' capital distributions, mainly because the
estimated reduction in their tier 1 capital requirements is small.
Additionally, the final rule will not change common equity tier 1
capital requirements, which will continue to limit GSIBs' capital
distributions. Furthermore, as discussed above, rather than increasing
capital distributions, GSIBs could also respond to the reduction in
their leverage capital requirements by using their existing capital to
grow, especially by increasing their low-risk asset holdings. As such,
the estimated reduction in tier 1 capital requirements constitutes a
high-end estimate for the potential
[…truncated; see source link]Indexed from Federal Register on December 1, 2025.
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