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

Federal RegisterJul 10, 2025

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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:

Notice of proposed rulemaking.

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 inviting public comment on a notice of proposed rulemaking (proposal) to modify the enhanced supplementary leverage ratio standards applicable to U.S. bank holding companies identified as global systemically important bank holding companies (GSIBs) and their depository institution subsidiaries. Specifically, the proposal would modify the enhanced supplementary leverage ratio buffer standard applicable to GSIBs to equal 50 percent of the bank holding company's method 1 surcharge as determined by the Board's GSIB risk-based capital surcharge framework. The proposal would also modify the enhanced supplementary leverage ratio standard for depository institution subsidiaries of GSIBs to have the same form and calibration as the GSIB parent level standard. The proposed modifications would help ensure that the enhanced supplementary leverage ratio standards serve as a backstop to risk-based capital requirements rather than as a constraint that is frequently binding over time and through most points in the economic and credit cycle, thus reducing potential disincentives for GSIBs and their depository institution subsidiaries to participate in low-risk, low-return businesses. The Board is also proposing to amend its total loss-absorbing capacity and long-term debt requirements to maintain alignment between these requirements and the enhanced supplementary leverage ratio standards. The OCC is proposing to revise the methodology it uses to identify which national banks and Federal savings associations are subject to the enhanced supplementary leverage ratio standards to better align with the agencies' regulatory tailoring framework for large banking organizations and ensure that the standards apply only to those national banks and Federal savings associations that are subsidiaries of a GSIB. The Board is also proposing to make conforming amendments to relevant regulatory reporting forms. The Board and FDIC are also proposing to make certain technical corrections to the capital rule.

DATES:

Comments must be received on or before: August 26, 2025.

ADDRESSES:

Comments should be directed to:

OCC:

You may submit comments to the OCC by any of the methods set forth below. Commenters are encouraged to submit comments through the Federal eRulemaking Portal. Please use the title “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” to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

•

Federal eRulemaking Portal—Regulations.gov:

Go to

https://regulations.gov/.

Enter “Docket ID OCC-2025-0006” in the Search Box and click “Search.” Public comments can be submitted via the “Comment” box below the displayed document information or by clicking on the document title and then clicking the “Comment” box on the top-left side of the screen. For help with submitting effective comments, please click on “Commenter's Checklist.” For assistance with the

Regulations.gov

site, please call 1-866-498-2945 (toll free) Monday-Friday, 8 a.m.-7 p.m. ET, or email

regulationshelpdesk@gsa.gov.

•

Mail:

Chief Counsel's Office, Attention: Comment Processing, Office of the Comptroller of the Currency, 400 7th Street SW, Suite 3E-218, Washington, DC 20219.

•

Hand Delivery/Courier:

400 7th Street SW, Suite 3E-218, Washington, DC 20219.

Instructions:

You must include “OCC” as the agency name and “Docket ID OCC-2025-0006” in your comment. In general, the OCC will enter all comments received into the docket and publish the comments on the

Regulations.gov

website without change, including any business or personal information provided such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this action by the following methods:

•

Viewing Comments Electronically—Regulations.gov:

Go to

https://regulations.gov/.

Enter “Docket ID OCC-2025-0006” in the Search Box and click “Search.” Click on the “Dockets” tab and then the document's title. After clicking the document's title, click the “Browse All Comments” tab. Comments can be viewed and filtered by clicking on the “Sort By” drop-down on the right side of the screen or the “Refine Comments Results” options on the left side of the screen. Supporting materials can be viewed by clicking on the “Browse Documents” tab. Click on the “Sort By” drop-down on the right side of the screen or the “Refine Results” options on the left side of the screen checking the “Supporting & Related Material” checkbox. For assistance with the

Regulations.gov

site, please call 1-866-498-2945 (toll free) Monday-Friday, 8 a.m.-7 p.m. ET, or email

regulationshelpdesk@gsa.gov.

The docket may be viewed after the close of the comment period in the same manner as during the comment period.

Board:

You may submit comments, identified by Docket No. R-1867 and RIN 7100-AG96, by any of the following methods:

Agency Website:

https://www.federalreserve.gov/apps/proposals/.

Follow the instructions for submitting comments,

including attachments.

Preferred Method.

Federal eRulemaking Portal:

http://www.regulations.gov.

Follow the instructions for submitting comments.

Email:

publiccomments@frb.gov.

You must include docket number and RIN in the subject line of the message.

Fax:

(202) 452-3819 or (202) 452-3102.

Mail, Courier and Hand Delivery:

Ann Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551.

Instructions:

All public comments are available from the Board's website at

https://www.federalreserve.gov/apps/proposals/

as submitted, unless modified for technical reasons. Accordingly, comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room M-4365A, 2001 C Street NW, Washington, DC 20551, between 9:00 a.m. and 5:00 p.m. on federal weekdays. For security reasons, the Board requires that visitors make an appointment to inspect comments. You may do so by calling (202) 452-3684. Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to security screening in order to inspect and photocopy comments. For users of TTY-TRS, please call 711 from any telephone, anywhere in the United States.

FDIC:

You may submit comments to the FDIC, identified by RIN 3064-AG11, by any of the following methods:

Agency Website:

https://www.fdic.gov/federal-register-publications.

Follow instructions for submitting comments on the FDIC's website.

Mail:

Jennifer M. Jones, Deputy Executive Secretary, Attention: Comments/Legal OES (RIN 3064-AG11), Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

Hand Delivered/Courier:

Comments may be hand-delivered to the guard station at the rear of the 550 17th Street NW, building (located on F Street NW) on business days between 7 a.m. and 5 p.m. eastern time.

Email:

comments@FDIC.gov.

Include the RIN [3064-AG11] on the subject line of the message.

Public Inspection:

Comments received, including any personal information provided, may be posted without change to

https://www.fdic.gov/federal-register-publications.

Commenters should submit only information that the commenter wishes to make available publicly. The FDIC may review, redact, or refrain from posting all or any portion of any comment that it may deem to be inappropriate for publication, such as irrelevant or obscene material. The FDIC may post only a single representative example of identical or substantially identical comments, and in such cases will generally identify the number of identical or substantially identical comments represented by the posted example. All comments that have been redacted, as well as those that have not been posted, that contain comments on the merits of this notice will be retained in the public comment file and will be considered as required under all applicable laws. All comments may be accessible under the Freedom of Information Act.

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:

Anna Lee Hewko, Associate Director, (202) 530-6260; Juan Climent, Deputy Associate Director, (202) 872-7526; Brian Chernoff, Manager, (202) 731-8914; Missaka Warusawitharana, Manager, (202) 452-3461; Akos Horvath, Principal Economist, (202) 452-3048; Anthony Sarver, Senior Financial Institution Policy Analyst, (202) 475-6317; Nadya Zeltser, Senior Financial Institution Policy Analyst, (202) 452-3164, Division of Supervision and Regulation; Skander Van den Heuvel, Associate Director, (202) 452-2903, Division of Financial Stability; or Jay Schwarz, Deputy Associate General Counsel, (202) 731-8852; Mark Buresh, Senior Special Counsel, (202) 499-0261; Ryan Rossner, Senior Attorney, (202) 430-1368; Isabel Echarte, 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 (703) 254-0778; Michael Maloney, Senior Policy Analyst (703) 254-0792; Kyle McCormick, Senior Policy Analyst (703) 254-0743; Keith Bergstresser, Senior Policy Analyst (703) 254-0754; Eric Schatten, Senior Policy Analyst (703) 254-0838; Soo Jeong Kim, Policy Analyst (703) 254-0405; Matthew Park, Financial Analyst (703) 562-2742; Capital Markets and Accounting Policy Branch, Division of Risk Management Supervision; Catherine Wood, Counsel (202) 898-3788; Merritt Pardini, Counsel (202) 898-6680; Kevin Zhao, Senior Attorney (202) 898-3682; Jimi Du, Senior Attorney, (202) 898-3646; Legal Division,

regulatorycapital@fdic.gov,

(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 Proposal

II. Proposed Modification to the Enhanced Supplementary Leverage Ratio Standards

A. Calibration of the Holding Company and Depository Institution Standards

B. Potential Modification to the Supplementary Leverage Ratio Calculation

C. Modification to the Form of the Depository Institution Standard

III. Amendments to Total Loss-Absorbing Capacity and Long-Term Debt Requirements

IV. Applicability Thresholds of the eSLR Standard for OCC-Supervised Institutions

V. Technical Corrections

VI. Economic Analysis

A. Introduction

B. Baseline

1. The Role of Banking Organizations as Investors in U.S. Treasury Markets

2. Treasury Securities Held by Banking Organizations Subject to Category I to III Standards

C. Proposed Policy Change

D. Reasonable Alternatives

E. Changes in the Supplementary Leverage Ratio and Tier 1 Capital Requirements

F. Benefits

G. Costs

H. Analysis of Proposed TLAC and Long-Term Debt Requirement Changes

1. Baseline

2. Changes in Requirements

3. Anticipated Economic Effects

I. Conclusion

J. 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

2. Estimating the Available Capacity of Holding Companies for Additional U.S. Treasury Securities Held at Broker-Dealer Subsidiaries, Assuming Perfect Hedging

VII. 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. Providing Accountability Through Transparency Act of 2023

I. Introduction

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) are proposing to 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) and their depository institution subsidiaries.

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.

The proposal would adjust the calibration of the eSLR standards, as discussed in section II.A of this

SUPPLEMENTARY INFORMATION

, to help ensure that such standards generally serve as a backstop to risk-based capital requirements through the economic and credit cycle, rather than as a regularly binding constraint.

This recalibration would reduce disincentives for GSIBs and their depository institution subsidiaries to participate in low-risk, low-return businesses, such as U.S. Treasury market intermediation conducted by broker-dealer subsidiaries of GSIBs.

Under the capital rule, banking organizations are required to satisfy multiple minimum capital requirements, which are augmented by the capital buffer framework. In addition, insured depository institutions are subject to the prompt corrective action framework. In the context of this

Supplementary Information

, a banking organization's “binding tier 1 capital requirement” refers to the highest of all of its tier 1 capital requirements, inclusive of the capital buffer framework and the prompt corrective action framework, expressed in dollar terms.

In section II.B of this

SUPPLEMENTARY INFORMATION

, the Board invites comment on the advantages and disadvantages of a potential modification to the supplementary leverage ratio calculation to help further address concerns regarding undesired disincentives of a regularly binding supplementary leverage ratio requirement on U.S. Treasury market intermediation. This potential modification would exclude from the denominator of the supplementary leverage ratio held-for-trading Treasury securities of a broker-dealer subsidiary of a depository institution holding company that is not a subsidiary of a depository institution.

The proposal would also modify the form of the eSLR standard for depository institution subsidiaries of GSIBs, as discussed in section II.C of this

SUPPLEMENTARY INFORMATION

, to align with the eSLR standard applicable at the parent GSIB level.

In addition, the Board is proposing to amend its total loss-absorbing capacity (TLAC) and long-term debt requirements, as discussed in section III of this

SUPPLEMENTARY INFORMATION

, to reflect the proposed change to the eSLR standard. Elements of these requirements were calibrated to align with the eSLR standard, and the proposal would maintain such alignment.

The OCC is proposing to modify the criteria it uses to determine applicability of the eSLR standard for depository institutions, such that the standard would apply to those national banks and federal savings associations that are subsidiaries of U.S. GSIBs identified by the Board. This proposed change is discussed in section IV of this

SUPPLEMENTARY INFORMATION

. The Board and FDIC are also proposing to make certain technical corrections to the capital rule, as discussed in section V of this

SUPPLEMENTARY INFORMATION

Section VI of this

SUPPLEMENTARY INFORMATION

presents the economic analysis of the proposed changes.

The agencies seek comment on all aspects of the proposal.

A. Overview of Leverage Capital Requirements for Large Banking Organizations

In 2013, the agencies adopted a revised regulatory capital rule (capital rule) to address weaknesses that became apparent during the financial crisis of 2007-08.

The agencies' capital rule includes two leverage-based requirements for large banking organizations.

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, and 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.

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.

Each of these 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.

See

12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR 324 (FDIC). 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 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.

See

12 CFR 6.4(b)(1)(i)(D), 3.10(a)(1)(iv), (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

22 U.S.C. 9522 note; Federal Deposit Insurance Corporation Improvement Act of 1991 § 305(b)(2), Public Law 102-242, 105 Stat. 2236, 2355.

The proposed recalibration of the eSLR standards would help mitigate potential disincentives for GSIBs and their depository institution subsidiaries 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. GSIBs and their depository institution subsidiaries play a key role in supporting market liquidity and providing financing in Treasury markets, as discussed above.

The proposal would differ from the agencies' 2020 temporary exclusion of Treasury securities and reserves in that it would maintain the principle that the denominator of the supplementary leverage ratio should be broad and not create preferences for certain low-risk assets over others. Additionally, the recalibration approach of the proposal would better achieve the objectives of the proposal than would the 2020 exclusion approach. It would more comprehensively address the undesired incentive effects of binding leverage ratio requirements. It would also provide large banking organizations significant additional flexibility and capacity to maintain or increase low-risk, low-return activities, including but not limited to U.S. Treasury market intermediation. This flexibility would be beneficial throughout economic and credit cycles.

Excluding exposures from total leverage exposure would also differ from the leverage capital standard published by the Basel Committee. The Basel standard provides for a potential temporary exclusion of central bank reserves, but solely under exceptional macroeconomic circumstances and only when paired with an upward calibration of the minimum requirement.

See

the Basel standard's provision LEV30.4, available at

https://www.bis.org/basel_framework/chapter/LEV/30.htm?inforce=20191215&published=20191215.

As discussed in section VI of this

SUPPLEMENTARY INFORMATION

, the proposed change to the calibration of the eSLR standard for bank holding companies would reduce the eSLR standard relative to risk-based capital requirements for GSIBs, which would reduce the frequency of the eSLR standards being these banking organizations' binding capital constraint without significantly reducing their overall level of required capital. Accordingly, this proposed change would reduce undesired incentive effects from a regularly binding or near-binding leverage capital requirement, while not materially altering the risk profile of these banking organizations.

As further discussed in section VI of this

SUPPLEMENTARY INFORMATION

, since depository institution subsidiaries of GSIBs are not subject to the more stringent risk-based capital buffers and surcharges applicable to their GSIB parent holding companies, risk-based capital requirements for such depository institutions tend to be generally lower relative to leverage capital requirements.

Therefore, addressing bindingness of the eSLR standard for depository institution subsidiaries of GSIBs would more significantly reduce levels of required capital relative to the reduction in required capital of their parent holding companies. Although the proposal would reduce tier 1 capital requirements for these depository institutions, almost all of this capital would need to be retained within their consolidated holding companies because the proposal would only slightly reduce GSIB holding company tier 1 capital requirements.

For example, the capital conservation buffer for depository institutions is set to 2.5 percent of risk-weighted assets and is not expanded by the stress capital buffer and GSIB surcharge applicable at the top-tier GSIB level.

Question 1:

What are the advantages and disadvantages of replacing the fixed two percent eSLR buffer standard applicable to a GSIB with a buffer standard equal to 50 percent of a GSIB's method 1 risk-based surcharge? What other modifications should the Board consider for purposes of ensuring that the eSLR buffer standard generally does not serve as the binding capital constraint for GSIBs, and why? Please provide any rationale or data that may be helpful for the Board to consider.

Question 2:

What are the advantages and disadvantages of the proposed calibration of the eSLR buffer standard for a depository institution subsidiary of a GSIB? What alternative calibration, such as a fixed buffer lower than three percent, should the agencies consider, and why? What would be the advantages and disadvantages of adding a fixed component for the eSLR buffer of depository institution subsidiaries (for example, 50 percent of a GSIB's method 1 surcharge plus a fixed component in the range of 0.5 percent to 1 percent)?

Question 3:

What other potential modifications to the regulatory capital framework should the agencies consider to address the binding nature of the supplementary leverage ratio requirements relative to risk-based capital requirements, consistent with safety and soundness? For example, what would be the advantages and disadvantages of establishing a risk-based surcharge for depository

institution subsidiaries of GSIBs? Please provide any rationale or data that may be helpful for the agencies to consider.

Question 4:

How, if at all, would the proposed calibration of the eSLR standards affect business decisions of GSIBs and their depository institution subsidiaries, such as their ability to serve as a source of credit to the economy during periods of economic stress? How, if at all, would the proposal change the incentives for GSIBs and their depository institution subsidiaries to participate in low-risk, low-return businesses? How, if at all, would the proposed calibration of the eSLR standards affect safety and soundness? Please provide any rationale or data that may be helpful for the agencies to consider.

B. Potential Modification to the Supplementary Leverage Ratio Calculation

In contrast to risk-based capital requirements, leverage capital requirements generally do not differentiate the amount of capital required by exposure type. A banking organization is required to include all of its on-balance sheet assets, including Treasury securities and other low-risk exposures, and certain off-balance sheet exposures in total leverage exposure, the denominator of the supplementary leverage ratio.

The proposed recalibration of the eSLR standards is intended to reduce the likelihood that such standards become a regularly binding capital constraint for GSIBs and their depository institution subsidiaries and thus reduce disincentives for these banking organizations to participate in low-risk activities that might be associated with important market functions. Although all depository institution holding companies subject to the supplementary leverage ratio requirement or eSLR standards would have substantial balance-sheet capacity under the proposal before these requirements or standards become binding, as discussed in section VI of this

SUPPLEMENTARY INFORMATION

, the Board is considering the benefits and drawbacks of an additional approach to complement the proposed recalibration.

In particular, the ability of a banking organization to hold certain assets, such as Treasury securities, is essential to U.S. Treasury market functioning, financial intermediation, and funding market activity, particularly in periods of financial uncertainty. Therefore, the Board is seeking comment on a potential modification to the calculation of total leverage exposure for depository institution holding companies to exclude Treasury securities that are reported as trading assets on the organizations' balance sheets and that are held at broker-dealer subsidiaries (and foreign equivalents thereof) that are not subsidiaries of a depository institution (broker-dealer subsidiaries) (narrow exclusion approach).

The narrow exclusion approach could provide further certainty such that, if these holding companies' balance sheets or activities change in the future, they would not face disincentives to Treasury market intermediation due to a binding supplementary leverage ratio requirement.

Under the narrow exclusion approach, a broker-dealer subsidiary would be covered if it is registered with the U.S. Securities and Exchange Commission or is a foreign equivalent to a registered broker-dealer.

This narrow exclusion approach would provide an automatic “safety valve” for Treasury market intermediation for cases in which balance sheets rapidly expand, as they did in 2020. In addition, this approach would enable a larger group of depository institution holding companies, including those subject to Category II or III capital standards in addition to GSIBs, to increase their U.S. Treasury market intermediation without affecting the required amount of tier 1 capital under the supplementary leverage ratio requirement and the potential for it to become a regularly binding regulatory capital constraint.

As discussed in section VI of this

SUPPLEMENTARY INFORMATION

, supplementary leverage ratio requirements are not currently binding for any banking organizations subject to Category II or III standards.

The narrow exclusion approach would focus on the legal entities and balance sheet exposures directly involved in making markets in U.S. Treasury securities. It thus attempts to balance the incentive goals discussed above with the conceptual basis of the supplementary leverage ratio requirement, which broadly includes exposures in total leverage exposure in order to serve as a risk-insensitive backstop to risk-based capital requirements. A potential drawback of this approach is that excluding exposures from the denominator of the supplementary leverage ratio could lead to requests to exclude additional exposures. Excluding material quantities or categories of exposures from the supplementary leverage ratio would undermine its effectiveness as a risk-insensitive backstop and would differ from the international leverage standard published by the Basel Committee.

Importantly, under the narrow exclusion approach, most banking organizations' exposures to excluded Treasury securities would continue to be subject to regulatory capital requirements. Specifically, for banking organizations subject to the market risk capital framework, the interest-rate risk of the excluded Treasury securities would be captured by the market risk elements of the risk-based capital framework.

In addition, under U.S. GAAP, Treasury securities classified as trading are measured at fair value, with profits and losses recorded in the organization's consolidated income statement. As such, the associated earnings volatility and its effects on regulatory capital could limit incentives for regulatory arbitrage.

See

12 CFR 217, subpart F.

The Board requests comment on all aspects of the narrow exclusion approach.

Question 5:

What would be the advantages and disadvantages of incorporating the narrow exclusion approach in any final rule, and why? What, if any, challenges would banking organizations have in identifying the securities to be excluded from total leverage exposure as described above and what clarifications would be helpful to address any such challenges?

Question 6:

What modifications, if any, to the narrow exclusion approach should the Board consider, and why?

Question 7:

What incentive effects would exempting only Treasury securities classified as trading and held by broker-dealer subsidiaries have on capital allocation or the conduct of activities within a consolidated banking organization, and what adjustments should the Board consider due to such effects?

Question 8:

To what extent do legal entities other than broker-dealers within consolidated banking organizations engage in material U.S. Treasury market intermediation? What would be the advantages and disadvantages of including some or all Treasury securities held by such entities in any exclusion from the supplementary leverage ratio, and why? What alternative methods of targeting exclusions from the supplementary leverage ratio should the agencies consider (for example, based on specific activities such as Treasury-based repurchase or reverse repurchase arrangements), and why? In such cases, how could the agencies address boundary issues to ensure that the exclusion targets Treasury market intermediation? Please provide any supporting data and rationale that the agencies should consider.

Question 9:

In addition to the changes to the supplementary leverage ratio requirements being considered in this proposal, what other changes to the bank regulatory framework, if any, should the agencies consider to reduce regulatory impediments to well-functioning U.S. Treasury markets while appropriately taking into consideration the objectives of the framework? For example, what additional changes should the agencies consider in the context of the mandatory central clearing of certain U.S. Treasury transactions? How might repo-style transactions, including transactions with the Federal Reserve, be more appropriately reflected in the supplementary leverage capital requirements or other areas of the regulatory framework? What are the potential costs and benefits of such changes?

Question 10:

What additional or alternative changes to the capital rule should the agencies consider to ensure that the capital rule is able to function appropriately throughout the business cycle and particularly during periods of stress? What, if any, additional “safety valves” should the agencies consider incorporating into the capital rule to better respond to periods of stress and to reduce the risk that emergency action may be necessary (for example, a more specific reservation of authority, in addition to 12 CFR 3.1(d)(4), 217.1(d)(4), 324.1(d)(4))?

C. Modification to the Form of the Depository Institution Standard

The proposal would remove the eSLR threshold for a depository institution subsidiary of a GSIB to be considered “well capitalized” under the prompt corrective action framework and instead implement the eSLR for such banking organizations as a buffer standard.

The prompt corrective action framework establishes capital categories at which an insured depository institution will become subject to increasingly stringent limitations on its activities.

Among other measures, this framework includes a three percent supplementary leverage ratio threshold for any insured depository institution subject to Category I, II, or III capital standards to be considered “adequately capitalized.” Until the adoption of the eSLR standards in 2014, the 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 insured depository institution subsidiaries of the largest and most complex banking organizations would be considered “well capitalized.”

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 (December 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).

In April 2018, the Board and OCC jointly proposed certain modifications to the eSLR standards for GSIB holding companies and Board- and OCC-regulated insured depository institution subsidiaries (2018 proposal) that would have relied on a requirement derived from the GSIB surcharge framework to determine a banking organization's applicable eSLR standard (similar to the approach included in this proposal).

As part of the 2018 proposal, the two agencies requested comment on the appropriateness of an alternative that would have implemented the proposed eSLR standard for GSIBs' depository institution subsidiaries as a capital buffer standard instead of as a threshold for such banking organizations to be considered “well capitalized.” Specifically, under this approach, the prompt corrective action framework would have retained the three percent supplementary leverage ratio requirement to be considered “adequately capitalized,” but would have no longer included the heightened six percent supplementary leverage ratio threshold to be considered “well capitalized.” Instead, the eSLR standard would have been applied to depository institution subsidiaries of GSIBs alongside the existing capital conservation buffer (in the same manner that the eSLR standard applies to GSIBs). In considering this alternative, the two agencies noted that tying a banking organization's eSLR standard to its GSIB surcharge meant that the “well capitalized” threshold could change from year to year depending on the activities of the organization.

83 FR 17317 (April 18, 2018).

The majority of commenters on the 2018 proposal supported the alternative form of the eSLR as a buffer standard at the depository institution level. Several of these commenters supported this approach as a means of harmonizing and aligning with the eSLR standard applicable to holding companies. Two of these commenters stated that the payout restriction of a buffer provided a type of “early warning” threshold that should trigger changes in capital management before the more severe consequences of prompt corrective action framework limitations apply.

Further to this point, one of these commenters stated that in the context of risk-based capital requirements, the agencies calibrated the capital conservation buffer requirement and risk-based prompt corrective action well-capitalized thresholds so that insured depository institutions would be subject to payout restrictions under the buffer requirements before losing well-capitalized status. Another of these commenters expressed concern that maintaining the eSLR standard as part of the prompt corrective action framework, which historically has used fixed ratios to establish uniform standards across insured depository institutions, could result in different standards being used across banking organizations as a result of surcharges that can differ across GSIBs.

The “well capitalized” threshold is used to determine eligibility for a variety of regulatory purposes, such as streamlined application procedures, status as a financial holding company for parent bank holding companies, the ability to control or hold a financial interest in a financial subsidiary, and in certain expansionary interstate applications.

See e.g.,

12 U.S.C. 24a; 12 U.S.C.1831u(b)(4); 12 U.S.C. 1842(d); 12 U.S.C. 1843(j)(4)(A). Insured depository institutions that do not meet the requirements to be considered “well capitalized” under the prompt corrective action framework face restrictions on their operations; for example, such insured depository institutions may not control or own an interest in a financial subsidiary. 12 U.S.C. 1831o. They also face restrictions on accepting brokered deposits without a waiver from the FDIC, a prohibition from accepting employee benefit plan deposits, limits on exposure to interbank liabilities, potential restrictions on opening a branch, and in certain situations, potential effects on Deposit-Insurance Fund premiums. 12 U.S.C. 371b-2 (implemented in 12 CFR part 206); 12 U.S.C. 1821(a)(1)(D)(ii); 12 U.S.C. 1831f; 12 U.S.C. 1831o(e)(4); 12 CFR part 327.

Based on further consideration by the agencies on the form of the eSLR standard at the depository institution level, including considerations raised in comments the Board and OCC received on the 2018 proposal, the agencies are proposing to implement the eSLR standard for depository institutions as a buffer standard rather than as a threshold to be considered “well capitalized” within the prompt corrective action framework.

This approach would align the form of the depository institution eSLR standard with that of the holding company, which could enhance effective capital management across a banking organization. In addition, a buffer approach may have less pro-cyclical effects because a banking organization may choose to use its buffer during times of economic stress, which could lessen the likelihood that the banking organization would reduce lending and other activities during such times. At the same time, the payout restrictions of a leverage buffer framework would continue to provide an incentive for covered depository institutions to maintain sufficient capital and reduce the risk that their capital levels would fall below their minimum requirements during economic downturns. A leverage buffer framework would provide “early warning” benefits relative to prompt corrective action thresholds, consistent with commenters' views on the 2018 proposal.

As discussed

supra

n.25, as a result of this change, certain national bank subsidiaries, specifically, uninsured national banks chartered pursuant to 12 U.S.C. 27(a), would become subject to the eSLR standard. 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.

Specifically, under the proposal, a depository institution subsidiary of a GSIB would have an eSLR buffer standard equal to 50 percent of its parent company's method 1 surcharge in order to avoid facing restrictions on capital distributions and certain discretionary bonus payments. The proposed leverage buffer framework would follow the same general mechanics and structure as the capital conservation buffer contained in the agencies' respective capital rules.

For example, if a GSIB calculates a method 1 surcharge of 1.5 percent, a depository institution subsidiary of the GSIB would be subject to an eSLR buffer standard of 0.75 percent (one-half of the parent GSIB's 1.5 percent method 1 surcharge). Therefore, the depository institution subsidiary would need to have a supplementary leverage ratio greater than 3.75 percent (three percent minimum supplementary leverage ratio plus 0.75 percent eSLR buffer standard) to avoid limitations on capital distributions and certain discretionary bonus payments.

See

12 CFR 3.11(a) (OCC); 12 CFR 217.11(a) (Board); 12 CFR 324.11(a) (FDIC).

If the depository institution subsidiary of a GSIB maintains a leverage buffer that is less than or equal to 100 percent of its leverage buffer standard, a payout limitation would apply in accordance with Table 1 below. The leverage buffer's potential limitations on distributions and discretionary bonus payments would be applied to a covered depository institution alongside any limitations imposed by the capital conservation buffer or any other supervisory or regulatory measures. Similar to its parent GSIB, if the depository institution subsidiary of a GSIB is constrained by either or both a capital conservation buffer and the leverage buffer, the depository institution would be required to apply the more binding payout ratio.

Table 1—Calculation of Maximum Leverage Payout Amount

Leverage buffer

Maximum payout ratio (as a

percentage of eligible

retained income)

Greater than the depository institution's leverage buffer standard

No payout ratio limitation applies.

Less than or equal to 100 percent of the depository institution's leverage buffer standard, and greater than 75 percent of the depository institution's leverage buffer standard

60 percent.

Less than or equal to 75 percent of the depository institution's leverage buffer standard, and greater than 50 percent of the depository institution's leverage buffer

40 percent.

Less than or equal to 50 percent of the depository institution's leverage buffer standard, and greater than 25 percent of the depository institution's leverage buffer standard

20 percent.

Less than or equal to 25 percent of the depository institution's leverage buffer standard

0 percent.

Continuing the earlier example, assume the depository institution subsidiary described above reported a supplementary leverage ratio of 3.5 percent on its most recent Call Report. Although the depository institution exceeds its three percent minimum supplementary leverage ratio requirement, its reported supplementary leverage ratio is less than 100 percent of the depository institution's leverage buffer standard. The depository institution has a leverage buffer standard of 0.75 percent, but maintains a leverage buffer of only 0.5 percent. Because the depository institution's leverage buffer is approximately only 67 percent of its leverage buffer standard, according to the Table 1 above, the depository institution would be subject to a 40 percent maximum payout ratio (assuming it does not face any further constraints imposed by the current capital conservation buffer or any other supervisory or regulatory measures).

The proposal would retain the minimum supplementary leverage ratio threshold of three percent to be considered “adequately capitalized” under the prompt corrective action framework.

Question 11:

What are the advantages and disadvantages of applying the eSLR standard as a leverage buffer rather than as part of the prompt corrective action framework for depository institution subsidiaries of GSIBs? What alternatives, if any, should the agencies consider, and why?

III. Amendments to Total Loss-Absorbing Capacity and Long-Term Debt Requirements

The Board requires GSIBs to maintain outstanding minimum levels of TLAC based on risk-based and leverage-based measures and to meet buffers on top of both the risk-weighted asset and leverage components of the TLAC requirements in order to avoid limitations on the firm's capital distributions and certain discretionary

bonus payments.

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.

This buffer amount was expressly designed to align with the eSLR buffer standard applicable to these firms.

Accordingly, the Board is proposing to replace the two percent TLAC leverage buffer with a new TLAC leverage buffer equal to the eSLR buffer standard under the proposal. This change would maintain the original alignment of the TLAC leverage buffer and the eSLR standards. The Board is not proposing to change the minimum level of TLAC that a GSIB is required to maintain.

See

12 CFR part 252, subpart G.

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.

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 (Jan. 24, 2017), 8276.

This proposal would not impact the total loss-absorbing capacity or long-term debt requirements applicable to any U.S. intermediate holding company required to be established pursuant to 12 CFR 252.153 that is controlled by a global systemically important foreign banking organization, as such requirements were not calibrated based on the eSLR framework. 12 CFR part 252, subpart P.

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.

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. GSIBs are therefore subject to an external long-term debt requirement equal to 4.5 percent of their total leverage exposure (the five percent eSLR standard minus a balance-sheet depletion allowance of 0.5 percent). As a result, the leverage-based component of the external long-term debt requirement seeks to ensure that if the GSIB's tier 1 capital is depleted, and the GSIB fails and enters resolution, the eligible external long-term debt would be sufficient to fully recapitalize the GSIB by replenishing its capital to at least the amount required to meet the minimum leverage capital requirement and buffer applicable to GSIBs.

82 FR 8266, 8275.

When establishing the long-term debt requirement, the Board stated that it would consider updating the requirement in the event that it updated capital requirements for GSIBs in a way that materially changes their structure or calibration.

Accordingly, the Board is proposing 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 therefore be total leverage exposure multiplied by 2.5 percent (the minimum supplementary leverage ratio of three percent minus 0.5 percent to allow for balance sheet depletion) plus the eSLR buffer standard under the proposal as discussed in section II.A of this

Supplementary Information

Id.

As discussed further in section VI.H of this

Supplementary Information

, the proposed changes would reduce GSIBs' TLAC leverage-based buffer and long-term debt leverage-based minimum requirement by between 0.75 and 1.50 percentage points. The Board's TLAC and long-term debt framework applicable to GSIBs would continue to be consistent with and exceed international standards developed by the Financial Stability Board, which do not include a minimum long-term debt amount and have a somewhat lower minimum leverage-based TLAC requirement.

Question 12:

What are the advantages and disadvantages of the proposed modification of the external TLAC leverage buffer and long-term debt requirements to align with the proposed changes to the eSLR standard, and why? What, if any, alternative approaches should the Board consider with respect to the calibration of total leverage exposure-based TLAC and long-term debt requirements and why?

Question 13:

What effect, if any, would the proposed modification to the external TLAC leverage buffer and long-term debt requirements have on the potential for an orderly resolution of a failed GSIB? With respect to any adverse effects that may be identified, what alternatives should the Board consider, and why?

Question 14:

In light of the proposed changes to the external TLAC leverage buffer and long-term debt requirements, what other adjustments to the long-term debt and TLAC framework should the Board consider, if any? What would be the advantages and disadvantages of reducing by 50 percent 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? What would be 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?

IV. Applicability Thresholds of the eSLR Standard for OCC-Supervised Institutions

When the agencies adopted a final rule that established the eSLR standards in 2014, the final rule applied to U.S. top-tier bank holding companies with consolidated assets over $700 billion or more than $10 trillion in assets under custody and their insured depository institution subsidiaries. Subsequently, in 2015, the Board adopted a final rule establishing the GSIB surcharge framework, which provides for a methodology for identifying a holding company as a GSIB and applies a risk-based capital surcharge to such a banking organization.

As part of the GSIB surcharge framework, the Board revised the scope of application of the eSLR standards to any holding company identified as a GSIB and to each Board-regulated insured depository institution subsidiary of a GSIB. In November 2020, the FDIC issued a final rule to align the applicability of the eSLR standard with the revisions implemented by the Board, to cover only FDIC-supervised institutions that are subsidiaries of GSIBs.

12 CFR part 217, subpart H;

see also

“Regulatory Capital Rules: Implementation of Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies,” 80 FR 49082 (August 14, 2015).

12 CFR 324.403(b)(1)(ii); 85 FR 74257 (November 20, 2020).

The OCC's current eSLR standard applies to national banks and Federal savings associations with more than $700 billion in total consolidated assets or more than $10 trillion total in assets under custody, or that are subsidiaries of holding companies that meet those thresholds. To be consistent with the Board's regulations for identifying

GSIBs and applying the eSLR standards for holding companies and their depository institution subsidiaries, and consistent with the FDIC's regulations, the OCC is proposing to modify the scope of application of the eSLR standard for OCC-supervised banks. Specifically, the OCC proposes to remove the existing asset size thresholds and instead apply the eSLR standard to those national banks and federal savings associations that are subsidiaries of GSIBs identified by the Board's GSIB surcharge framework. Currently, 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. As a result, this proposed change would not have any impact on the current application of the eSLR standard. Additionally, this proposed change would also result in a consistent scope of application of the eSLR standards across the Federal banking agencies and would be consistent with the regulatory tailoring framework for large banking organizations adopted by the agencies in 2019.

See

84 FR 59230 (Nov. 1, 2019).

Question 15:

What, if any, unintended consequences may result from removing the current asset size and assets under custody thresholds of the eSLR standard for OCC-supervised institutions, and why?

V. Technical Corrections

The proposal includes certain technical corrections. The Board is proposing to revise 12 CFR 217.11(c)(3)(ii)(A)-(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 replace 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 is proposing to remove outdated references in its prompt corrective action regulation to the supplementary leverage ratio's effective date of January 1, 2018.

VI. Economic Analysis

A. Introduction

As discussed in section I.B of this

Supplementary Information

, the proposal aims generally for the supplementary leverage ratio requirement to be a backstop to risk-based tier 1 capital requirements for GSIBs and their depository institution subsidiaries.

The rationale for the proposed recalibration of the eSLR standards is twofold. First, this change would reduce the likelihood and frequency of the supplementary leverage ratio requirement being a binding tier 1 capital requirement for these banking organizations. Second, this change would reduce disincentives for these banking organizations to participate in low-risk, low-return activities, such as U.S. Treasury market intermediation.

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 to III standards, plus the eSLR standards, which are an additional two percent for GSIBs and an additional three percent for their depository institution subsidiaries.

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 of their depository institution subsidiaries. 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 proposal would address these incentives by reducing the calibration of the eSLR standards, thereby enabling most GSIBs to increase their U.S. Treasury market intermediation activities up to their available capacity without causing the supplementary leverage ratio requirement to become binding, which would also reduce the need for temporary adjustments in the event of severe market stress.

The agencies estimate that, in the period from Q2 2021 to Q4 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” depository institution subsidiaries of GSIBs.

For each GSIB, this calculation reflects its 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 (“major” depository institution subsidiaries).

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 banking 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, in the extreme, 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. Overall, 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.

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.

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; in particular, GSIBs' primary

dealer subsidiaries are the largest U.S. Treasury securities dealers.

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.

See

the discussion related to Table 5 in section VI.B of this

Supplementary Information

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 (August 3, 2023).

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, has expanded by 139 percent, from $10 trillion to $24 trillion, since 2014.

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. 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.

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 of Federal Reserve System Open Market Account because market intermediation activity is closely related to U.S. Treasury securities held by the public sector.

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 (October 22, 2024).

Table 2—Growth of the U.S. Treasury Market, U.S. Primary Dealers, and the U.S. Treasury Securities Holdings of U.S. Primary Dealers Over the Last Decade

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 System Open Market Account of the Federal Reserve (

see: https://www.newyorkfed.org/markets/soma-holdings

); 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.

This table shows the aggregate amounts of U.S. Treasury securities outstanding, the total assets of primary dealers, and the long U.S. Treasury securities positions of primary dealers, measured in trillions of dollars at the end of 2014 and 2024. The right column shows percentage changes in these aggregates from 2014 to 2024. The amount of U.S. Treasury securities outstanding excludes the amount of U.S. Treasury securities holdings in the System Open Market Account (SOMA) of the Federal Reserve. The last row shows the percentage ratio of the amount of U.S. Treasury securities held by primary dealers to the amount of U.S. Treasury securities outstanding, excluding SOMA holdings.

2014

2024

Growth

(%)

U.S. Treasury securities outstanding (excl. SOMA holdings)

$10.0tr

$24.0tr

139

Total assets of primary dealers

$3.3tr

$4.2tr

Primary dealer U.S. Treasury securities positions (long only)

$0.24tr

$0.61tr

155

Relative to U.S. Treasury securities outstanding

2.4%

2.5%

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).

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 to III standards in the wake of the COVID-19 market stress.

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 holding companies subject to Category II and III standards, to significantly expand their U.S. Treasury securities holdings.

See, e.g.,

the discussion of concerns about U.S. Treasury market functioning and proposed solutions, for example, 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 (December 16, 2020).

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 to III standards, as well as their depository institution subsidiaries, effective April 14, 2020, and June 1, 2020. 85 FR 20578 (April 14, 2020); 85 FR 32980 (June 1, 2020).

Basel Committee on Banking Supervision, 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.

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.

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.

The empirical findings in Bräuning and Stein (2024) indicate that the primary dealer subsidiaries of banking organizations subject to Category I to III standards that face relatively more 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.

Overall, the academic literature suggests that reducing the supplementary leverage ratio requirement's bindingness could improve the functioning of the U.S Treasury market.

For example, Li, Petrasek, Tian (2024) finds 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 (March 1, 2024) (“Li, Petrasek, Tian (2024)”).

G. Favara, S. Infante, and M. Rezende, Leverage Regulations and Treasury Market Participation: Evidence from Credit Line Drawdowns, SSRN (August 4, 2022) (“Favara, Infante, Rezende (2022)”).

D. Duffie et al., Dealer Capacity and U.S. Treasury Market Functionality, Federal Reserve Bank of New York Staff Report (August 2023,

rev.

October 2023) (“Duffie et al. (2023)”).

F. Bräuning 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) (“Bräuning and Stein (2024)”).

The structure of the economic analysis is as follows. Section VI.B describes the baseline for the impact assessment, which is the current regulatory framework, and the data sources used. Sections VI.C and VI.D present the proposal and four reasonable policy alternatives to the proposal. Section VI.E estimates the change in the supplementary leverage ratio requirement and the binding tier 1 capital requirement for banking organizations subject to Category I to III standards under the proposal and the policy alternatives, relative to the baseline. Sections VI.F and VI.G evaluate the economic benefits and costs, respectively, of the proposal and the policy alternatives. Section VI.H analyzes the impact of the proposed changes to the long-term debt and total loss-absorbing capacity buffer requirements. Section VI.I concludes the economic 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 to III standards in the absence of a policy change. Accordingly, throughout the analysis, the agencies assess the economic impact of the proposal and the policy alternatives considered, described in sections VI.C and VI.D of this

Supplementary Information

, respectively, by comparing outcomes estimated under the proposal 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 to 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 to III standards from 2021 to 2024 indicates that using a longer sample period would yield similar estimates.

Unless stated otherwise, the analysis uses publicly available data reported in FR Y-9C filings for holding companies and FFIEC Call Reports for depository institutions.

In certain calculations related to the total leverage exposure of holding companies, the agencies use publicly available data reported in FFIEC 101 filings.

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.

The agencies calculate the amount of U.S. Treasury securities holdings of primary dealers by using confidential data from FR 2004A filings.

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.

From FFIEC 101 filings, the agencies use the field AAABH015.

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

https://www.federalreserve.gov/supervisionreg/basel/denominators.htm.

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 to III standards, the agencies focus on each holding company'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 (“major” depository institution subsidiaries). 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.

These depository institution subsidiaries include the uninsured national trust bank subsidiaries of GSIBs that would become subject to the eSLR standard under the proposal, as discussed in section I.C of this

Supplementary Information

. There are six such uninsured national trust 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 to III standards in 2024.

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 the major depository institution subsidiaries of GSIBs, 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.

The agencies calculated tier 1 capital requirements for banking organizations subject to Category I to 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).

Table 3—Baseline Tier 1 Capital Requirements (Percentage of Total Leverage Exposure)

This table shows the tier 1 capital requirements for holding companies subject to Category I and Category II/III standards (Panel A), and their “major” depository institution subsidiaries (Panel B), expressed as a percentage of their total leverage exposures, under the baseline. The numbers represent

averages calculated across banking organizations in each category over the four quarters of 2024, weighted by their total assets. The data used in this table are described in section VI.B of this

Supplementary Information

Panel A: Holding Companies

Risk-based

Leverage ratio

Supplementary leverage ratio

Category I

5.1

3.4

5.0

Category II/III

5.2

3.5

3.0

Panel B: Depository Institutions

Risk-based

Leverage ratio

Supplementary leverage ratio

Category I

4.0

4.2

6.0

Category II/III

5.0

4.3

3.0

The agencies estimate that the supplementary leverage ratio requirement is the binding tier 1 capital requirement for five out of the eight GSIBs and eight out of their nine major depository institution subsidiaries under the baseline. 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 binding tier 1 capital requirement.

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 depository institution subsidiaries under the baseline. For GSIBs, the level of the supplementary leverage ratio requirement ranges from 87 to 111 percent of the risk-based tier 1 capital requirement, whereas for their major depository institution subsidiaries, the 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 their depository institution subsidiaries 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.

Accordingly, 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 GSIBs' depository institution subsidiaries than for GSIBs.

Risk-based capital buffer requirements are higher for GSIBs than for their depository institution subsidiaries because of the GSIB surcharge and the stress capital buffer.

The proposal also affects requirements and buffer standards for TLAC and long-term debt. The agencies present a baseline analysis for these standards in section VI.H of this

Supplementary Information

1. Role of Banking Organizations as Investors in U.S. Treasury Markets

In addition to their critical role as intermediaries in the U.S. Treasury market, banking organizations also act as investors in this market. 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 possibly until maturity.

Most of these investment securities are held by depository institution subsidiaries.

Under U.S. GAAP, investment securities holdings can be classified as “available-for-sale” or “held-to-maturity” securities on banking organizations' balance sheets.

See

the discussion related to Table 5 in section VI.B of this

Supplementary Information

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. 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.

Table 4—Growth of the U.S. Treasury Market, U.S. Depository Institutions, and Their U.S. Treasury Securities Holdings Over the Past Decade

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.

This table shows the aggregate amounts of U.S. Treasury securities outstanding, the total assets of U.S. depository institutions, and the U.S. Treasury securities of U.S. depository institutions, measured in trillions of dollars at the end of 2014 and 2024. The right column shows the percentage changes in these aggregates from 2014 to 2024. The two rows at the bottom show the percentage ratios of the amount of U.S. Treasury securities holdings by U.S. depository institutions to the amount of U.S. Treasury securities outstanding and their total assets, respectively.

2014

2024

Growth

U.S. Treasury securities outstanding

$12.5tr

$28.1tr

125%

Total assets of U.S. depository institutions

$14.1tr

$22.5tr

Treasury securities held by depository institutions

$0.42tr

$1.54tr

264

Relative to Treasury securities outstanding

3.4%

5.5%

Relative to the total assets of depository institutions

3.0%

6.8%

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

Banking organizations subject to Category I to 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.

Table 5—U.S. Treasury Securities Holdings

This table shows the magnitude of U.S. Treasury securities holdings of banking organizations subject to Category I to III standards. The numbers represent averages taken across banking organizations within each category over the four quarters in 2024. The table distinguishes all U.S. Treasury securities from those reported as trading assets by these banking organizations. The left side of the table quantifies the U.S. Treasury securities holdings of holding companies, measured both in trillions of dollars, at fair value, and as a percentage of total leverage exposure. The right side of the table shows the percentage share of consolidated holding companies' U.S. Treasury securities held by their depository institution subsidiaries, with the last column reflecting only those consolidated holding companies whose holdings of U.S. Treasury securities reported as trading assets exceed one percent of their total leverage exposures. The data used in this table are described in section VI.B of this

Supplementary Information

. In particular, for these holding companies and their depository institution subsidiaries, the fair value amounts of U.S. Treasury securities holdings reported as trading assets are obtained from FR Y-9C and FFIEC Call Report data fields BHCM 3531 and RCFD 3531, respectively.

Holding company

($ trillion)

All

(Percentage of total leverage exposures)

All

Trading

Depository institution share

(Relative to holding company securities holdings)

Within all

Within trading

Category I

1.7

69%

23%

Category II/III

0.2

Table 5 also shows that the two distinct roles of banking organizations subject to Category I to III standards as intermediaries and investors in the U.S. Treasury market have a disproportionate footprint on their balance sheets, both at their consolidated holding companies and across their subsidiaries. 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.

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 VI.B of this

Supplementary Information

describes the data used in this calculation.

C. Proposed Policy Change

The proposal would set the eSLR standard for GSIBs to half of their method 1 surcharge instead of the two percent buffer standard applicable under the baseline. Additionally, for the depository institution subsidiaries of GSIBs, the proposal would set the eSLR buffer standard to half of the method 1 surcharge of their parent holding companies, removing the six-percent threshold for these depository institutions to be considered “well-capitalized” under the prompt corrective action framework under the baseline.

The proposal would not change the three percent supplementary leverage ratio minimum requirement or the calculation of total leverage exposure for banking organizations subject to Category I to III standards.

D. Reasonable Alternatives

The analysis considers four reasonable alternatives to the proposal. 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 proposal.

Alternative 1 is the “additional narrow exclusion” approach described

in section II.B of this

Supplementary Information

. It would include all proposed changes for GSIBs and their depository institution subsidiaries and would additionally exclude from the calculation of total leverage exposure for holding companies subject to Category I to III standards U.S. Treasury securities that are reported as trading assets on the holding companies' balance sheets and that are 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 would not change the eSLR standards like the proposal but would instead exclude 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 to III standards. This policy alternative would be similar to the temporary exclusion of these assets from the calculation of total leverage exposure implemented by the agencies in 2020.

See

Alternative 3 (“2018 proposal”) would set the eSLR standards for GSIBs and their depository institution subsidiaries equal to half of the higher of method 1 and method 2 surcharges. This policy alternative would be 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.

This proposed rule was not finalized. Using the higher of a GSIB's method 1 and method 2 surcharge would be consistent with the calculation of the GSIB surcharge under the risk-based capital framework for GSIBs.

See

83 FR 17317 (April 19, 2018).

Alternative 4 (“combined”) would be a combination of the proposal and Alternative 2. As such, this policy alternative would both set eSLR standards for GSIBs as well as their depository institution subsidiaries like the proposal and exclude 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 to III standards.

E. Changes in the Supplementary Leverage Ratio and Tier 1 Capital Requirements

The agencies estimate that the proposal would substantially reduce the supplementary leverage ratio requirement for GSIBs and their depository institution subsidiaries relative to the baseline. As Table 6 shows, the proposal would reduce the requirement by 23 percent, on average, for the holding companies, ranging from 15 to 30 percent across GSIBs, and by 36 percent, on average, for the major depository institution subsidiaries of GSIBs, ranging from 29 to 42 percent across these subsidiaries. Meanwhile, banking organizations subject to Category II and III standards would see no reduction in the supplementary leverage ratio requirement because the proposal would not change their baseline requirement.

Table 6—Estimated Percentage Change in the Supplementary Leverage Ratio Requirement

This table shows the estimated percentage change in the supplementary leverage ratio requirement relative to the current (that is, baseline) requirement, measured in dollars, under the proposal and the different policy alternatives, described in section VI.D of this

Supplementary Information

. The numbers represent averages calculated across holding companies subject to Category I and Category II/III standards (Panel A), and their “major” depository institution subsidiaries (Panel B) over the four quarters of 2024, weighted by their total assets. The data used in this table are described in section VI.B of this

Supplementary Information

Panel A: Holding Companies

Proposal

Policy alternatives

No. 1

No. 2

No. 3

No. 4

Category I

−23

−25

−14

−8

−34

Category II/III

−1

−11

Category I-III

−18

−20

−14

−6

−29

Panel B: Depository Institutions

Proposal

Policy alternatives

No. 1

No. 2

No. 3

No. 4

Category I

−36

−15

−23

−45

Category II/III

−12

Category I-III

−27

−14

−17

−37

Alternative 1 (“additional narrow exclusion”) would have a quantitatively similar effect to that of the proposal, reducing the supplementary leverage ratio requirement slightly more, by 25 percent, on average, for GSIBs and by the same amount, 36 percent, on average, for their major depository institution subsidiaries. Relative to the baseline, this policy alternative would slightly reduce the supplementary leverage ratio requirement for holding companies subject to Category II and III standards.

This small incremental reduction in the supplementary leverage ratio requirement for holding companies would be 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.

Under Alternative 1, the estimated reduction in the supplementary leverage ratio requirement for holding companies subject to Category II and III would be modest because it would solely be 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 would remain unchanged.

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.

Alternative 2 (“broader exclusion”) would lead to a much smaller reduction in the supplementary leverage ratio requirement for GSIBs and their depository institution subsidiaries than the proposal. This policy alternative would affect GSIBs and banking organizations subject to Category II to III standards to a similar extent because it would exclude reserves and all U.S. Treasury securities holdings from the calculation of total leverage exposure for all of these banking organizations. Specifically, it would reduce the supplementary leverage ratio requirement for these banking organizations by 14 percent, on average. The reduction in the requirement would be 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”) would lead to a smaller reduction in the supplementary leverage ratio requirement for GSIBs and their depository institution subsidiaries than the proposal. This is because, as discussed in section VI.D of this

Supplementary Information

, the proposal would set the eSLR standards to half of the method 1 surcharge, whereas this policy alternative would set the eSLR standards to half of the higher of the method 1 and method 2 surcharges. Specifically, Alternative 3 would reduce the supplementary leverage ratio requirement by 8 percent, on average, for GSIBs and by 23 percent, on average, for their major depository institution subsidiaries. Like the proposal, this policy alternative would lead 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 VI.D of this

Supplementary Information

, it would set 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 their depository institution subsidiaries under the baseline. Like the proposal, this policy alternative would not change the supplementary leverage ratio requirement for banking organizations subject to Category II and III standards.

Alternative 4 (“combined”) would combine the effects of the proposal and the “broader exclusion” alternative, reducing the supplementary leverage ratio requirement by 34 percent and 45 percent, on average, for GSIBs and their major depository institution subsidiaries, respectively, and by a little more than 10 percent, on average, for banking organizations subject to Category II and III standards.

Similar to the “additional narrow exclusion” alternative, the “combined” alternative would reduce tier 1 capital requirements for GSIBs and their depository institution subsidiaries much more than for banking organizations subject to Category II and III standards because GSIBs and their depository institution subsidiaries would be 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, while banking organizations subject to Category II and III standards would only be affected by the exclusion.

The effect of Alternative 4 would be less than the sum of the proposal'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 standard under this combined policy alternative.

Turning to the backstop objective of the proposal, the proposal would meaningfully reduce the supplementary leverage ratio requirement relative to the risk-based tier 1 capital requirement for GSIBs and their depository institution subsidiaries. As Table 7 shows, the proposal would reduce the 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 their major depository institution subsidiaries, respectively. Under the proposal, the level of the supplementary leverage ratio requirement would 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 their major depository institution subsidiaries. Therefore, the proposal would set the level of the supplementary leverage ratio requirement below the level of the risk-based tier 1 capital requirement for all GSIBs, thereby making the supplementary leverage ratio a backstop for all holding companies subject to Category I to III standards. Furthermore, the proposal would set the level of the supplementary leverage ratio requirement below the level of the risk-based tier 1 capital requirement for 6 out of the 9 major depository institution subsidiaries of GSIBs under the proposal. As explained, the proposal would not change the supplementary leverage ratio requirement for banking organizations subject to Category II and III standards. However, 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.

Table 7—Ratio of the Supplementary Leverage Ratio Requirement to the Risk-Based Tier 1 Capital Requirement

This table shows the ratio of the supplementary leverage ratio requirement, measured in dollars, to the higher of the standardized approach and advanced approaches risk-based tier 1 capital requirements, measured in dollars. The ratio is calculated under the baseline, the proposal, and the different policy alternatives described in section VI.D of this

Supplementary Information

Panel A: Holding Companies

Baseline

Proposal

Policy alternatives

No. 1

No. 2

No. 3

No. 4

Category I

0.98

0.75

0.74

0.84

0.91

0.65

Category II/III

0.65

0.64

0.58

0.65

0.58

Category I-III

0.91

0.73

0.71

0.78

0.85

0.63

Panel B: Depository Institutions

Baseline

Proposal

Policy alternatives

No. 1

No. 2

No. 3

No. 4

Category I

1.54

1.00

1.31

1.19

0.85

Category II/III

0.64

0.57

0.64

0.57

Category I-III

1.32

0.91

1.12

1.06

0.78

The changes in the relative level of the supplementary leverage ratio requirement under the policy alternatives would be consistent with the estimated percentage changes in the supplementary leverage ratio requirement discussed earlier. The effect of Alternative 1 (“additional narrow exclusion”) would be quantitatively similar to that of the proposal. Alternative 2 (“broader exclusion”) would reduce the relative level of the leverage ratio requirement for GSIBs and their depository institution subsidiaries by less than the proposal. For banking organizations subject to Category II and III standards, the reduction would be larger than under the proposal. Alternative 3 (“2018 proposal”) would reduce the relative level of the leverage ratio requirement less for GSIBs and their depository institutions than the proposal. Importantly, Alternatives 2 and 3 would not achieve the goal of making the supplementary leverage ratio requirement a backstop for GSIBs because it would exceed the risk-based tier 1 capital requirement for some GSIBs under these policy alternatives. Alternative 4 would reduce the relative level of the leverage ratio requirement the most of all policy alternatives. However, the supplementary leverage ratio requirement would still exceed the risk-based tier 1 capital requirement for two depository institution subsidiaries of GSIBs under this policy alternative.

Turning to changes in tier 1 capital requirements, the agencies estimate that the proposal would reduce tier 1 requirements for most GSIBs and their depository institution subsidiaries. Table 8 shows that the aggregate reduction in tier 1 capital requirement would be $13 billion for GSIBs and $213 billion for their major depository institution subsidiaries in the long-term under the proposal. For GSIBs, the estimated reduction in tier 1 capital requirement relative to the baseline is small, less than 2 percent, in aggregate, ranging from zero to 7.4 percent. 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.

By contrast, for the major depository institution subsidiaries of GSIBs, the estimated reduction in tier 1 capital requirement relative to the baseline is sizable, about 27 percent, in aggregate, ranging from zero to 37 percent. 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, which implies that the substantial estimated reduction in the supplementary leverage ratio requirement for these depository institutions under the proposal would mostly translate to a reduction in their tier 1 capital requirements.

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

the tier 1 leverage ratio requirement becomes the binding tier 1 capital requirement. Under the baseline, the risk-based tier 1 capital requirement exceeds the tier 1 leverage ratio requirement for all except one GSIBs.

Specifically, as discussed in relation to Table 7, the baseline level of the supplementary leverage ratio requirement is 54 percent higher than the baseline level of the risk-based tier 1 capital requirement for the major depository institution subsidiaries of GSIBs.

Table 8—Estimated Change in Tier 1 Capital Requirement ($ billion)

This table shows the baseline amount of tier 1 capital and the estimated change in tier 1 capital requirement under the proposal and the different policy alternatives, described in section VI.D of this

SUPPLEMENTARY INFORMATION

. The numbers are measured in billions of dollars and represent aggregate amounts for Category I and Category II/III holding companies (Panel A) and their “major” depository institution subsidiaries (Panel B), averaged over the four quarters of 2024. The data used in this table are described in section VI.B of this

SUPPLEMENTARY INFORMATION

Panel A: Holding Companies

Baseline

tier 1 capital

requirement

Estimated change in tier 1 capital requirement

Proposal

Policy alternatives

No. 1

No. 2

No. 3

No. 4

Category I

931

−13

Category II/III

273

Total

1,204

−13

Panel B: Depository Institutions

Baseline

tier 1 capital

requirement

Estimated change in tier 1 capital requirement

Proposal

Policy alternatives

No. 1

No. 2

No. 3

No. 4

Category I

789

−213

−118

−148

−219

Category II/III

220

Total

1,008

−213

−118

−148

−219

Alternatives 1, 2, and 4 would lead to the same aggregate reduction in the tier 1 capital requirement for GSIBs as the proposal because all of these policy alternatives would reduce the supplementary leverage ratio requirement below the other (risk-based and leverage) tier 1 capital requirements for all GSIBs. By contrast, the agencies estimate that Alternative 3 would lead to a small, less than $2 billion, aggregate increase in the tier 1 capital requirement for GSIBs, as one large GSIB would face an increase in its tier 1 capital requirement.

For major depository institution subsidiaries of GSIBs, 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. This “combined” alternative would reduce tier 1 capital requirements for the major depository institution subsidiaries of GSIBs by $6 billion more, in aggregate, than the proposal. Notably, even though this policy alternative combines the effects of the proposal and the “broader exclusion” alternative, the estimated reduction under Alternative 4 is only slightly higher than under the proposal. This is because the proposal would set the supplementary leverage ratio requirement for most of these depository institutions below the other (risk-based and leverage) tier 1 capital requirements, and the additional effect of excluding assets from the calculation of total leverage exposures under the “combined” alternative for these depository institutions would not lead to a further reduction in their tier 1 capital requirements.

Similar to the proposal, the policy alternatives considered would 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.

Notably, the estimated changes in tier 1 capital requirements discussed above in Table 8 do not reflect short-run transition effects due to risk-based total capital requirements. Thus far, the analysis has only considered the risk-based tier 1 capital requirements, the tier 1 leverage ratio requirement, as well as the supplementary leverage ratio requirement. However, banking organizations must also meet the risk-based total capital requirement, where total capital comprises tier 1 capital and tier 2 capital, which includes a limited percentage of allowance for credit losses on loans and leases as well as subordinated debt. Therefore, if the baseline tier 2 capital amount ($76 billion, in aggregate) of these depository institutions remains unchanged in the short run, they would utilize tier 1 capital to satisfy the remaining total capital requirement. Incorporating this effect into the calculation, the agencies estimate that the aggregate reduction in tier 1 requirements for these depository institutions would be $191 billion. However, over time, or in anticipation of the policy change, these depository institutions could increase their tier 2 capital, so that the aggregate reduction in tier 1 capital requirements would be closer to the $213 billion estimate presented in Table 8.

Up to this point, the analysis has focused on the major depository institution subsidiaries of holding companies subject to Category I to III standards, as described in section VI.B of this

SUPPLEMENTARY INFORMATION

. The rest of the insured depository institution subsidiaries of holding companies subject to Category I to III standards account for 0.7 percent of the consolidated total assets of these holding companies, in aggregate. These smaller subsidiaries would slightly add to the aggregate reduction in the supplementary leverage ratio and the tier 1 capital requirements estimated above.

Finally, the proposal would increase the supplementary leverage ratio requirement for the uninsured national trust subsidiaries of GSIBs by expanding the scope of application of the eSLR standard to these subsidiaries. As noted in section VI.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 would be subject to under the proposal. Therefore, the agencies expect that the proposal would 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 their depository institution

subsidiaries under the proposal would have two main economic benefits: (1) it would reduce 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 facilitating intermediation activities of the largest banking organizations. In the rest of this section, the agencies discuss these benefits in more detail.

The first benefit would be due to the significant reduction in the supplementary leverage ratio requirement for these banking organizations under the proposal, estimated in section VI.E, which would have both a level effect and a marginal effect, discussed in section VI.A of this

SUPPLEMENTARY INFORMATION

. The level effect would manifest as the reduced calibration of the eSLR standards would enable these banking organizations to substantially increase low-risk asset holdings without raising their tier 1 capital requirements. The marginal effect would manifest as the proposal would set the supplementary leverage ratio requirement, in dollar terms, below risk-based tier 1 capital requirements for all GSIBs and most of their depository institution subsidiaries. By doing so, the proposal would 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 proposal, increasing low-risk-weight activities would not lead to a significant increase in tier 1 capital requirements for these banking organizations, because the risk-based tier 1 capital requirement would be their binding tier 1 capital requirement. Moreover, this marginal effect would reduce incentives for these banking organizations to excessively engage 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.

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.

Similar to the proposal, the “additional narrow exclusion” Alternative 1 and the “combined” Alternative 4 would reduce these unintended marginal incentives for GSIBs and their depository institution subsidiaries. By contrast, this economic benefit would not fully manifest under the “broader exclusion” Alternative 2 and the “2018 proposal” Alternative 3, as the supplementary leverage ratio requirement would remain above the risk-based tier 1 capital requirement for one GSIB under “the 2018 proposal” alternative and for most depository institution subsidiaries of GSIBs under both policy alternatives. However, the “broader exclusion” alternative would still reduce unintended marginal incentives for these banking organizations to hold reserves and U.S. Treasury securities, as this policy alternative would exclude such assets from the calculation of total leverage exposure.

As mentioned above, in addition to this marginal effect, the proposed reduction in the calibration of the eSLR standards for GSIBs and their depository institution subsidiaries would also have a level effect, which would increase the capacity of these banking organizations to hold low-risk assets. The level effect manifests because banking organizations could 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 are below their risk-based tier 1 capital requirements.

The agencies do not have the information necessary to precisely estimate what type, and the dollar volume, of low-risk assets banking organizations would add to their balance sheets if the proposal were adopted. However, in order to quantify the magnitude of this effect under the proposal and the policy alternatives considered, the agencies create a simple estimate for the available capacity of GSIBs to increase reserves or U.S. Treasury securities held as investment securities at their depository institution subsidiaries and assess how the proposal would increase this capacity estimate.

Specifically, for each GSIB, the agencies define “available capacity” as the dollar amount of such assets that their depository institution subsidiaries could add to their balance sheets without raising their or their consolidated holding company's tier 1 capital requirements above baseline levels.

For a comprehensive assessment of the policy alternatives considered, the agencies also create this available capacity estimate 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.

Especially, banking organizations would 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.

Notably, the agencies use this capacity estimate to illustrate the magnitude of the proposal'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.

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 would increase risk-based tier 1 capital requirements for GSIBs. Section VI.J.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 proposal, and the policy alternatives considered. Under the proposal, the agencies estimate that GSIBs' available capacity for such assets would 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.

Under both the proposal and the different 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 as well as the tier 1 leverage ratio requirements of their depository institution subsidiaries.

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 their depository institution subsidiaries.

Table 9—Estimated Available Capacity of Holding Companies for Additional Reserves and U.S. Treasury Securities Held as Investment Securities at Depository Institution Subsidiaries

This table shows the estimated available capacity of holding companies subject to Category I to III standards for additional reserves and U.S. Treasury securities held as investment securities at their depository institution

subsidiaries, expressed both in trillion dollars (Panel A) and as a percentage of baseline total leverage exposures of the consolidated holding companies (Panel B), grouped by size category. Section VI.J.1 of this

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describes the calculations underlying these capacity estimates in detail.

Panel A: Trillions of Dollars

Baseline

Proposal

Policy alternatives

No. 1

No. 2

No. 3

No. 4

Category I

0.0

1.1

1.2

1.4

0.2

1.4

Category II/III

0.7

0.8

0.7

0.8

Panel B: Percentage of Baseline Total Leverage Exposure

Baseline

Proposal

Policy alternatives

No. 1

No. 2

No. 3

No. 4

Category I

Category II/III

Alternative 1 (“additional narrow exclusion”) would lead 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 proposal, consistent with the similar quantitative effect of this alternative on the supplementary leverage ratio requirement. The agencies estimate that, of the policy alternatives considered, the “broader exclusion” and the “combined” alternatives would lead to the largest estimated increase in GSIBs' available capacity for such assets. The estimated increase would be $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 would exclude reserves and all U.S. Treasury securities holdings from the calculation of total leverage exposure.

Notably, increases in reserves or U.S. Treasury securities holdings would still increase tier 1 leverage ratio requirements, as well as GSIB method 1 and method 2 scores, which limits the available capacity estimate under the “broader exclusion” and the “combined” alternatives.

Of the policy alternatives considered, Alternative 3 (“2018 proposal”) would lead to the least estimated increase in GSIBs' available capacity for such assets. The estimated increase would be $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 would reduce the calibration of the eSLR standards for GSIBs and their depository institution subsidiaries less than the proposal. Finally, under the policy alternatives considered, there would not be a meaningful increase in 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.

Beyond reducing disincentives to holding low-risk assets in general, the proposal would 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 would reduce the amount of tier 1 capital required per each dollar of U.S. Treasury security held by GSIBs' primary dealer subsidiaries. This is because, under the proposal, the risk-based tier 1 capital requirement would 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.

A reduction in GSIBs' marginal tier 1 capital requirement would lower the marginal funding cost of holding U.S. Treasury securities for their primary dealer subsidiaries, which would reduce potential disincentives for these primary dealers to engage in U.S. Treasury market intermediation and improve their competitiveness as intermediaries in this market.

Under the market risk framework, the risk-based tier 1 capital requirement for holdings of U.S. Treasury securities by 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 the business of 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.

In addition to the marginal effect, the level effect of the proposal would 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 would manifest as the proposal would reduce 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. In order to quantify the magnitude of this effect under the proposal and the policy alternatives considered, the agencies create a simple estimate for the available capacity of GSIBs to increase U.S. Treasury securities held at their broker-dealer subsidiaries and assess how the proposal would 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.

Notably, the capacity estimates would be meaningfully lower if the securities holdings are not fully hedged.

For a comprehensive assessment of the policy alternatives considered, the agencies also create this available capacity estimate for holding companies subject to Category II and III standards.

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 treatment. 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 meth

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