# 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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2025-12787

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** July 10, 2025
- **Citation:** 90 FR 30780

## Text

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.
1

1

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.
2

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.

2
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.
3

The agencies' capital rule includes two leverage-based requirements for large banking organizations.
4

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.
5

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.
6

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.
7

3

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).

4

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.

5

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
12 CFR 3.12 (OCC); 12 CFR 217.12 (Board); 12 CFR 324.12 (FDIC).

6
In 2019, the agencies adopted rules establishing four categories of capital standards for U.S. banking organizations with $100 billion or more in total assets and foreign banking organizations with $100 billion or more in combined U.S. assets. Under this framework, Category I standards apply to GSIBs and their depository institution subsidiaries. Category II standards apply to banking organizations with at least $700 billion in total consolidated assets or at least $75 billion in cross-jurisdictional activity and their depository institution subsidiaries. Category III standards apply to banking organizations with total consolidated assets of at least $250 billion or at least $75 billion in weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposure and their depository institution subsidiaries. Category IV standards apply to banking organizations with total consolidated assets of at least $100 billion that do not meet the thresholds for a higher category and their depository institution subsidiaries.
See
12 CFR 3.2 (OCC), 12 CFR 238.10, 12 CFR 252.5, (Board), 12 CFR 324.2 (FDIC); “Prudential Standards for Large Bank Holding Companies, Savings and Loan Holding Companies, and Foreign Banking Organizations,” 84 FR 59032 (November 1, 2019); and “Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements,” 84 FR 59230 (November 1, 2019).

7

See
12 CFR 3.10(c) (OCC); 12 CFR 217.10(c) (Board); 12 CFR 324.10(c) (FDIC).

In 2014, the agencies adopted a final rule that requires GSIBs and their insured depository institution subsidiaries to meet enhanced supplementary leverage ratio

standards.
8

Specifically, each GSIB must maintain a supplementary leverage ratio of at least three percent plus a leverage buffer greater than two percent to avoid limitations on the GSIB's capital distributions and certain discretionary bonus payments.
9

In addition, any insured depository institution subsidiary of a GSIB must maintain a supplementary leverage ratio of at least six percent to be “well capitalized” under the prompt corrective action framework of the Board, OCC, or FDIC, as applicable.
10

8

See
“Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for Certain Bank Holding Companies and Their Subsidiary Insured Depository Institutions,” 79 FR 24528 (May 1, 2014). The eSLR standards were originally applicable to bank holding companies with more than $700 billion in total consolidated assets or $10 trillion in assets under custody and their subsidiary depository institutions. The Board revised the applicability of the eSLR standards in its rules to apply to GSIBs and their subsidiary depository institutions in connection with the GSIB surcharge rule.
See
80 FR 49082 (August 14, 2015). The FDIC made an equivalent change in 2020 and the OCC would make an equivalent change as part of this proposal.
See
85 FR 74257 (November 20, 2020).

9
The leverage buffer requirement follows the same general mechanics and structure as the capital conservation buffer requirement that applies to all banking organizations subject to the capital rule, though the capital conservation buffer requirement is calibrated differently. Specifically, a GSIB that maintains a leverage buffer of more than two percent of its total leverage exposure would not be subject to limitations on its distributions and certain discretionary bonus payments. A GSIB that maintains a leverage buffer of two percent or less would be subject to increasingly strict limitations on such payouts.
See
12 CFR 217.11.

10

See
12 CFR 6.4(b)(1)(i)(D)(2) (OCC); 12 CFR 208(b)(1)(i)(D)(
2
) (Board); 12 CFR 324.403(b)(1)(ii) (FDIC).

Statutory Authority for the Agencies' Supplementary Leverage Ratio Framework

Congress has authorized the agencies to establish leverage capital requirements and standards for banking organizations subject to this proposal. Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),
11

as amended by section 401 of the Economic Growth, Regulatory Relief, and Consumer Protection Act,
12

requires the Board to establish leverage limits for bank holding companies with $250 billion or more in total consolidated assets.
13

It also provides that the Board may apply any prudential standard established under section 165 to any bank holding company or bank holding companies with $100 billion or more in total consolidated assets to which the prudential standard does not otherwise apply, under certain circumstances.
14

The prompt corrective action framework in section 38 of the Federal Deposit Insurance Act requires the agencies to prescribe capital standards for insured depository institutions that include a leverage limit and provides that the agencies may establish any additional relevant capital measures to carry out the purpose of that section.
15

11
Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010).

12
Economic Growth, Regulatory Relief, and Consumer Protection Act, Public Law 115-174, 132 Stat. 1296 (2018).

13

See
12 U.S.C. 5365(a)(1), (b)(1)(A)(i). These provisions also apply to foreign banks or companies that are treated as a bank holding company for purposes of the Bank Holding Company Act.
See
12 U.S.C. 3106(a), 5311(a)(1).
See also
section 401(g) of the Economic Growth, Regulatory Relief, and Consumer Protection Act (regarding the Board's authority to establish enhanced prudential standards for foreign banking organizations with total consolidated assets of $100 billion or more).

14
12 U.S.C. 5365(a)(2)(C).

15

See
12 U.S.C. 1831o(c)(1)(A), (B)(i).

Furthermore, various statutory authorities provide the agencies with broad discretionary authority to set capital requirements and standards for banking organizations supervised by the agencies, including national banking associations, state-chartered banks, savings associations, and depository institution holding companies.
16

16

See
12 U.S.C. 93a (national banking associations); 12 U.S.C. 248(i), 324, 327, 329 (state member banks); 12 U.S.C. 1463 (savings associations); 12 U.S.C. 1467a(g)(1) (savings and loan holding companies); 12 U.S.C. 1844(b) (bank holding companies); 12 U.S.C. 3106 (certain U.S. operations of foreign banking organizations); 12 U.S.C. 3902(1)-(2), 3907(a), 3909(a), (c)(1)-(2) (depository institutions; affiliates of depository institutions, including holding companies; and certain U.S. operations of foreign banking organizations); 12 U.S.C. 5371 (insured depository institutions, depository institution holding companies, and nonbank financial companies supervised by the Board).

B. Objective of Rulemaking

The 2007-08 financial crisis demonstrated the importance of strong regulatory capital standards for the safety and soundness of individual banking organizations, as well as for the financial system as a whole. Within the regulatory capital framework, leverage and risk-based capital requirements play complementary roles, with each addressing potential risks not addressed by the other.
17

Risk-based capital requirements that are commensurate with the risk profile of a banking organization's exposures help to encourage prudent behavior by requiring a banking organization to maintain higher levels of capital for activities and exposures that present greater risk. Historical experience, however, has demonstrated that risk-based measures alone may be insufficient to support loss-absorbing capacity at banking organizations through economic cycles. For example, the 2007-08 financial crisis highlighted weaknesses in the design and calibration of risk-based capital requirements. Leverage capital requirements, which do not take into account the risks of a banking organization's exposures, can help to mitigate underestimations of risk both by banking organizations and risk-based capital requirements.
18

17
The regulatory capital framework is designed to help ensure that banking organizations maintain sufficient resources to absorb losses and prevent the distress or failure of a banking organization.
See
12 CFR 3.1 (OCC); 12 CFR 217.1 (Board); 12 CFR 324.1 (FDIC). The regulatory capital framework is comprised of both risk-based and leverage capital requirements. Risk-based capital requirements establish a minimum amount of regulatory capital a banking organization must maintain based on the risk profile of its on- and off-balance sheet exposures, whereas leverage capital requirements establish minimum risk-insensitive capital requirements.
See
12 CFR 3.10 (OCC); 12 CFR 217.10 (Board); 12 CFR 324.10 (FDIC).

18
Risk-based and leverage capital measures can also contain complementary information about a banking organization's condition.
See, e.g.,
Arturo Estrella, Sangkyun Park, and Stavros Peristiani, “Capital Ratios as Predictors of Bank Failure,”
Federal Reserve Bank of New York Economic Policy Review
(2000).

An appropriately calibrated leverage capital requirement sets a simple and transparent limit on a banking organization's leverage. In addition, leverage capital requirements can be useful to address cases where the level of risk at a particular banking organization or across the financial system is difficult to measure. However, when a leverage capital requirement is calibrated too high and becomes a banking organization's regularly binding capital requirement, it can create incentives for a banking organization to engage in higher-risk activities in search of higher returns and to reduce participation in lower-risk, lower-return activities. A banking organization that has a leverage capital requirement as its binding capital requirement can, on the margin, replace a lower-risk asset with a higher-risk asset without a corresponding increase in its overall regulatory capital requirement, a suboptimal outcome that runs counter to objectives of the regulatory capital framework.

As a notable example of concerns regarding the incentive effects of a binding supplementary leverage ratio requirement, a regularly binding leverage capital requirement could disincentivize large banking organizations from intermediating in the U.S. Treasury market. Market participants have suggested that such disincentives could, under certain circumstances, impede the orderly functioning of the U.S. Treasury market

and of U.S. and global financial markets more broadly.
19

The U.S. Treasury market is one of the deepest and most liquid markets in the world and serves as a source of safe and liquid assets that are used for a variety of purposes in the financial markets.
20

Confidence in the efficient functioning of the U.S. Treasury market, including during times of stress, is critical to the stability of the domestic and global banking and financial systems.

19

See, e.g.,
Z. He, S. Nagel, & Z. Song, Treasury Inconvenience Yields During the COVID-19 Crisis. 143 J. Fin. Econ.57-79 (2022); Group of Thirty Working Group on Treasury Market Liquidity, U.S. Treasury Markets: Steps Toward Increased Resilience (2021).

20

See
U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, and U.S. Commodity Futures Trading Commission, Enhancing the Resilience of the U.S. Treasury Market: 2023 Staff Progress Report (November 6, 2023).

Large banking organizations play important roles in all segments of the U.S. Treasury market. Many large banking organizations have broker-dealer subsidiaries that act as primary dealers in Treasury security auctions, serve as brokers and market makers in the secondary markets for Treasury securities and in related derivatives markets, and intermediate in securities financing transactions with Treasury securities as collateral. They also have depository institution subsidiaries that perform some of these functions, act as custodians holding Treasury securities on behalf of clients, and also transact in Treasury securities for investment, liquidity, and risk-management purposes. When large banking organizations become bound by leverage capital requirements, they can potentially face incentives to limit their intermediation in low-risk, low-return activities in the U.S. Treasury markets and reduce holdings of low-risk assets in general.

Appropriate calibration of regulatory capital requirements involves a balancing of considerations. A banking organization should maintain sufficient capital to absorb losses and remain a going concern over a range of conditions. In addition, it is important for the capital framework to not create potential disincentives for a banking organization to prudently act as a financial intermediary and to otherwise engage in low-risk activities or important market functions. The agencies regularly review the regulatory capital framework to help ensure requirements are appropriate in view of evolving risks and financial innovations and that the framework is functioning as intended. In reviewing the eSLR framework, the agencies considered factors such as alignment of requirements with risks; incentives for a banking organization to perform critical financial services over a range of economic conditions; and ways to enhance the efficiency of the framework.

Since the adoption of the eSLR standards, the agencies have observed that such standards have, for certain banking organizations, become a regularly binding constraint relative to risk-based capital requirements, as discussed in section VI of this
SUPPLEMENTARY INFORMATION
. Consequently, the Board and the OCC in 2018 proposed to recalibrate the eSLR standards for GSIBs and their insured depository institution subsidiaries from the fixed two percent, which applies to each GSIB, and three percent, which applies to their insured depository institutions, to equal 50 percent of the banking organization's GSIB risk-based capital surcharge to help ensure that the eSLR standards generally serve as a backstop to risk-based capital requirements.
21

21

See
“Regulatory Capital Rules: Regulatory Capital, Enhanced Supplementary Leverage Ratio Standards for U.S. Global Systemically Important Bank Holding Companies and Certain of Their Subsidiary Insured Depository Institutions; Total Loss-Absorbing Capacity Requirements for U.S. Global Systemically Important Bank Holding Companies,” 83 FR 17317 (April 18, 2018). The Board and the OCC did not finalize this proposal.

In 2020, the agencies finalized a rule to implement section 402 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, to exclude from the denominator of the supplementary leverage ratio certain central bank deposits of banking organizations predominately engaged in custody, safekeeping, and asset servicing activities.
22

Also in 2020, as the onset of the COVID pandemic significantly and adversely affected global financial markets, large banking organizations faced reduced balance sheet capacity under the supplementary leverage ratio due to customer draws on credit lines, acquisition of significant amounts of Treasury securities, substantial increases in deposits in their accounts at Federal Reserve Banks, and other financial intermediation activities. In response, the agencies adjusted the denominator of the supplementary leverage ratio to exclude Treasury securities and deposits at Federal Reserve Banks (reserves) on a temporary basis to provide these banking organizations additional flexibility to continue to act as financial intermediaries.
23

22
“Regulatory Capital Rule: Revisions to the Supplementary Leverage Ratio to Exclude Certain Central Bank Deposits of Banking Organizations Predominantly Engaged in Custody, Safekeeping, and Asset Servicing Activities,” 85 FR 4569 (Jan. 27, 2020).

23
For example, during the March 2020 economic turmoil, U.S. Treasury market liquidity rapidly deteriorated as a result of supply-demand imbalance, while primary dealers were reluctant to increase their holdings of U.S. Treasury securities, prompting market participants and regulators to consider enhancements to the resilience of the U.S. Treasury market. On April 1, 2020, the Board provided holding companies a temporary exclusion for U.S. Treasury securities and deposits at the Federal Reserve from the denominator of the supplementary leverage ratio through March 31, 2021. On May 15, 2020, the Board, the OCC, and the FDIC extended comparable treatment to depository institutions, which could elect this exclusion subject to capital action preapproval. Both interim final rules expired as scheduled on March 31, 2021.
See
“Temporary Exclusion of U.S. Treasury Securities and Deposits at Federal Reserve Banks from the Supplementary Leverage Ratio,” 85 FR 20578 (April 14, 2020) and “Regulatory Capital Rule: Temporary Exclusion of U.S. Treasury Securities and Deposits at Federal Reserve Banks from the Supplementary Leverage Ratio for Depository Institutions,” 85 FR 32980 (June 1, 2020).

In light of the experience gained since the initial adoption of the eSLR standards, and to avoid potential negative outcomes due to regularly binding eSLR standards, the agencies are proposing to recalibrate the eSLR standards to reduce the likelihood and frequency of the eSLR standards becoming a binding capital requirement for GSIBs and their depository institution subsidiaries. In addition, the proposed recalibration of the eSLR standards seeks to reduce disincentives for banking organizations to participate in U.S. Treasury market intermediation and reduce the need for temporary adjustments in the event of severe market stress, as occurred in 2020.

C. Overview of the Proposal

The proposal would make changes to the eSLR standards to reduce the likelihood of the eSLR standards being the binding regulatory capital constraint for GSIBs and their depository institution subsidiaries. Specifically, the Board is proposing to recalibrate the eSLR buffer standard for GSIBs to equal 50 percent of a GSIB's method 1 surcharge calculated under the Board's GSIB surcharge framework, rather than the current leverage buffer standard of two percent.
24

Similarly, the agencies

would modify the eSLR standard for depository institution subsidiaries of GSIBs from the current six percent “well capitalized” threshold under the prompt corrective action framework to an eSLR buffer standard equal to 50 percent of the parent GSIB's method 1 surcharge calculation. As a result, the eSLR standards would be the same in both form and calibration at the bank holding company and subsidiary depository institution levels.
25

24
The Board's capital rule requires a GSIB to calculate its GSIB risk-based surcharge in two ways, known as method 1 and method 2, and apply the higher of the two results. Under the rule, a firm identified as a GSIB must calculate its GSIB surcharge under two methods and be subject to the higher surcharge.
See
12 CFR 217.402, subpart H. The first method (method 1) is based on five categories that are correlated with systemic importance—size, interconnectedness, cross-jurisdictional activity, substitutability, and complexity. The second method (method 2) uses

similar inputs but replaces substitutability with the use of short-term wholesale funding and is calibrated in a manner that generally will result in surcharge levels for GSIBs that are higher than those calculated under method 1.

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.

In addition to these changes, the OCC is proposing to revise the methodology it uses to identify which national banks and Federal savings associations are subject to the eSLR standard to align with the agencies' regulatory tailoring framework and ensure that the standard applies only to those national banks and Federal savings associations that are subsidiaries of a GSIB. The Board is also proposing to make conforming modifications to the leverage-based components of the Board's total loss-absorbing capacity and long-term debt requirements that currently incorporate the eSLR standard's fixed two percent buffer construct. Lastly, the agencies are proposing to make certain technical corrections to the capital rule.

As further discussed in the economic analysis in section VI of this
SUPPLEMENTARY INFORMATION
, recalibrating the eSLR buffer standards for GSIBs and their depository institution subsidiaries would reduce unintended incentives for these banking organizations to engage in higher-risk activities and create significant balance sheet capacity for GSIBs and their depository institution subsidiaries to engage in lower-risk activities. Moreover, by recalibrating the eSLR standards such that they more often serve as a backstop than a binding constraint, the regulatory capital framework for these banking organizations would be more aligned with risk, supporting these banking organizations' role as financial intermediaries. The additional capacity for GSIBs could also help support the orderly functioning of U.S. Treasury markets, as their broker-dealer subsidiaries play a key role in intermediating these markets.

The proposal would lead to a less-than-two percent aggregate reduction in the tier 1 capital requirement for GSIBs and about 27 percent aggregate reduction in the tier 1 capital requirement for their depository institution subsidiaries. Although the capital requirements of the depository institution subsidiaries of GSIBs would decline, capital requirements applicable to GSIBs would remain approximately at their present level and with better incentive effects from leverage-based requirements declining below risk-based requirements. GSIBs would not be able to significantly increase dividend payments or other capital distributions, due to bank holding company capital requirements. The proposal would instead provide GSIBs greater discretion to determine the optimal allocation of capital within the consolidated organization. In addition, the capital rule would continue to require these banking organizations, notwithstanding the minimum requirements under the capital rule, to maintain capital commensurate with the level and nature of all risks to which they are exposed, to have a process for assessing their overall capital adequacy in relation to their risk profile, and to have a comprehensive strategy for maintaining an appropriate level of capital.
26

26
12 CFR 3.10(e) (OCC); 12 CFR 217.10(e) (Board); 12 CFR 324.10(e) (FDIC).

As discussed further in section VI.H of this
SUPPLEMENTARY INFORMATION
, under the proposal, aggregate TLAC requirements that apply to GSIBs would decline by approximately five percent, and aggregate long-term debt requirements would decline by approximately 16 percent. Although the reduction in long-term debt and TLAC requirements could reduce overall loss-absorbing capacity, including gone-concern resources available in resolution, the proposal would maintain the existing alignment of long-term debt and TLAC requirements with capital requirements, consistent with the approaches used to calibrate these requirements. The proposal is expected to support increased lending and economic activity and would be consistent with international standards.
27

27
The decline in long-term debt requirements can primarily be viewed as a compositional shift within the instruments needed to meet the TLAC requirements and thus unlikely to have a significant effect on lending or economic activity.

Overall, the agencies assess that the benefits of the proposal justify the costs.

II. Proposed Modifications to the Enhanced Supplementary Leverage Ratio Standards

A. Calibration of the Holding Company and Depository Institution Standards

The proposal would modify the eSLR standard applicable to GSIBs by recalibrating the fixed two percent eSLR buffer standard to equal 50 percent of a GSIB's method 1 surcharge as determined under the Board's GSIB surcharge framework.
28

The proposal would also align the calibration and, as discussed further in section II.C of this
SUPPLEMENTARY INFORMATION
, the form, of the eSLR standard applicable to depository institution subsidiaries of GSIBs with that applicable to their GSIB parent holding companies. Since the eSLR standards took effect in 2018, the current calibration has frequently become a binding capital constraint for GSIBs, as discussed in section VI.A of this
SUPPLEMENTARY INFORMATION
. Recalibrating the eSLR buffer standard to equal 50 percent of a GSIB's method 1 surcharge would reduce the supplementary leverage ratio requirement relative to risk-based requirements at the holding company level and allow leverage capital requirements and standards to generally serve as a backstop to risk-based capital requirements rather than as a regularly binding constraint.
29

28
In September 2023, the Board issued a notice of proposed rulemaking to amend the GSIB surcharge framework and related Systemic Risk Report (FR Y-15) to improve the precision of the GSIB surcharge and better measure systemic risk under the framework.
See
“Regulatory Capital Rule: Risk-Based Capital Surcharges for Global Systemically Important Bank Holding Companies; Systemic Risk Report (FR Y-15),” 88 FR 60385 (September 1, 2023). Any change to the GSIB surcharge framework could impact the magnitude of the eSLR buffer standards under this proposal.

29
For about half of depository institution subsidiaries of GSIBs, the tier 1 leverage ratio requirement would continue to exceed the risk-based requirement. Changing the tier 1 leverage requirement would implicate section 171 of the Dodd-Frank Act.
See
12 U.S.C. 5371.

Calibration based on the GSIB surcharge framework would take a GSIB's systemic footprint into account in the determination of its eSLR buffer standard. This approach would align with the purposes of the eSLR standards to strengthen the ability of these banking organizations to remain a going concern during times of economic stress and to minimize the likelihood that problems at these organizations would contribute to financial instability.
30

At

the time the agencies adopted the eSLR standards, the Board had not yet proposed the GSIB surcharge framework. Using a GSIB's method 1 surcharge, rather than the higher of its method 1 or method 2 surcharge that determines its risk-based surcharge, produces a generally lower calibration that is consistent with the objective for leverage capital requirements to act as a backstop to risk-based capital requirements. A calibration based on the GSIB surcharge framework would also help promote consistency in the eSLR standards for large, complex, and internationally active banking organizations across jurisdictions, as it would be consistent with the leverage ratio framework published by the Basel Committee on Banking Supervision (Basel Committee).
31

30

See
79 FR 24529 (May 1, 2014). Consistent with the original design of the eSLR standards, depository institution subsidiaries of GSIBs would be subject to requirements on the basis of their positions as components of the consolidated GSIBs,

and often as major components in terms of size, operations, and business activity. The proposal would align GSIB and subsidiary eSLR standards, removing the discrepancy in requirements in the current eSLR standards.

31

See
Basel Committee, “Basel III leverage ratio framework and disclosure requirements” (January 2014) available at
http://www.bis.org/publ/bcbs270.htm.
The Basel Committee is an international coordinating committee of banking supervisory authorities, established by the central bank governors of the G-10 countries in 1975, and comprised of representatives from supervisory authorities of 28 jurisdictions, that develops prudential minimum standards. More information regarding the Basel Committee and its membership is available at
https://www.bis.org/bcbs/about.htm.
Documents issued by the Basel Committee are available through the Bank for International Settlements website at
https://www.bis.org.

Where appropriate and consistent with the agencies' statutory authorities and policy objectives, general alignment of domestic financial regulatory policy with international standards can generate significant benefits, particularly regarding large, internationally active banking organizations. For example, international alignment can enhance the resilience of the U.S. financial system by limiting the potential for a global “race to the bottom” on prudential standards. The U.S. financial system is highly interconnected with the global financial system. By supporting robust prudential standards across the world, international alignment can enhance the resilience of the U.S. financial system by reducing the likelihood of distress or other problems that arise in a foreign jurisdiction from having negative effects in the United States.
32

32
For example, the Basel Committee was originally formed after the failure of Herstatt Bank in Germany in 1974, which contributed to serious disruptions to foreign currency and banking markets within and beyond Germany, demonstrating the need for better coordination among bank regulators in different jurisdictions.
See https://www.bis.org/bcbs/history.htm.

See, e.g.,
12 U.S.C. 1828 note, 3901, 3907, 3911, and 5373;
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.
33

33
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.
34

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.

34
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).
35

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.

35
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.
36

36
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.
37

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.

37

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.
38

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.”

38
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).
39

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.

39
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.
40

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.

40
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.
41

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.

41
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.
42

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.

42

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.
43

The leverage-based TLAC buffer is equal to two percent, above the 7.5 percent minimum leverage component of a GSIB's external TLAC requirement.
44

This buffer amount was expressly designed to align with the eSLR buffer standard applicable to these firms.
45

Accordingly, the Board 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.
46

43

See
12 CFR part 252, subpart G.

44

See
12 CFR 252.63. There is no buffer requirement over the leverage-based minimum total loss-absorbing capacity requirement for a U.S. intermediate holding company of a foreign banking organization subject to TLAC requirements. The TLAC requirement based on total leverage exposure for a U.S. intermediate holding company of a foreign banking organization subject to the TLAC framework is either 6.75 percent or six percent, depending on the planned resolution strategy of the company's parent global systemically important foreign banking organization. 12 CFR 252.165.

45

See
“Total Loss-Absorbing Capacity, Long-Term Debt, and Clean Holding Company Requirements for Systemically Important U.S. Bank Holding Companies and Intermediate Holding Companies of Systemically Important Foreign Banking Organizations,” 82 FR 8266 (Jan. 24, 2017), 8276.

46
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.
47

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.

47
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.
48

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
.

48

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.
49

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.
50

49
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).

50
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.
51

51

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.
52

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.

52
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.
53

53
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.
54

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.
55

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.
56

54
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.

55

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

56
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.
57

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.
58

57
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.

58
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
59

59
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
29

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).
60

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.
61

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.
62

60

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).

61

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).

62
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.
63

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.
64

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.
65

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.
66

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

63
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)”).

64
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)”).

65
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)”).

66
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.
67

In certain calculations related to the total leverage exposure of holding companies, the agencies use publicly available data reported in FFIEC 101 filings.
68

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.
69

The agencies calculate the amount of U.S. Treasury securities holdings of primary dealers by using confidential data from FR 2004A filings.
70

67
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.

68
From FFIEC 101 filings, the agencies use the field AAABH015.

69
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.

70
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.
71

71
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.
72

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.

72
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.
73

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.

73
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.
74

Most of these investment securities are held by depository institution subsidiaries.
75

74
Under U.S. GAAP, investment securities holdings can be classified as “available-for-sale” or “held-to-maturity” securities on banking organizations' balance sheets.

75

See
the discussion related to Table 5 in section 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
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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
60

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
9%
3%
69%
23%

Category II/III
0.2
5
2
63
0

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.
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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.
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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2025-12787. Public record. Not legal advice.