The Bank Policy Institute (BPI) has expressed support for the recent proposal by banking agencies to recalibrate the enhanced supplementary leverage ratio (eSLR). In a comment letter, BPI described the proposal as a prudent measure that could restore the eSLR to its original purpose and help maintain stability in Treasury markets.
Sarah Flowers, BPI Head of Capital Advocacy, stated: “This proposal marks progress toward a more data-driven approach to capital requirements, which will benefit economic growth. The eSLR should be a backstop, not a binding constraint, and this proposal would help restore that crucial balance. But the eSLR is only one part of the bigger picture, which includes necessary reforms to stress testing, the Basel III Endgame proposal, the GSIB surcharge and the tier 1 leverage ratio. We are encouraged by Vice Chair Bowman’s stated goals of considering the cumulative effects of regulatory requirements and questioning if regulations are fulfilling their purpose.”
According to BPI's analysis, the eSLR has shifted from its intended role as a backstop for risk-based capital requirements and now often acts as a binding constraint. Data show that for seven out of eight U.S. global systemically important banks (GSIBs), the eSLR represented the binding tier 1 capital requirement an average of 60% of the time. For depository institution subsidiaries of GSIBs, it was 87% on average.
BPI highlighted concerns that such constraints can discourage banks from increasing their holdings in U.S. Treasury markets during times of stress. Research from Federal Reserve economists indicates that large banks limited by leverage ratios like eSLR or SLR tend to hold fewer Treasuries than less constrained primary dealers. This trend can reduce market liquidity during periods of volatility.
While supporting changes to eSLR, BPI also called for broader reforms across risk-based and leverage capital rules. The institute suggested revising tier 1 leverage ratio standards so they serve primarily as backstops rather than acting as barriers to low-risk banking activities. Further recommendations include updates to GSIB surcharges, improvements in stress testing processes, and finalization of Basel III standards.
The Bank Policy Institute represents major U.S. banks including universal banks, regional institutions and foreign banks operating domestically. Together these firms employ nearly two million Americans and play a significant role in lending to small businesses across the country.
For further information or access to BPI’s full comment letter on this issue, contact Tara Payne at tara.payne@bpi.com.