
Fed Kicks off Effort to Ease Bank Leverage Rules
The comments below are an edited and abridged synopsis of an article by Pete Shroeder, Reuters
Federal Reserve Leverage Rule Changes: What’s at Stake for Banks And The Economy
This week, the Federal Reserve leverage rule changes are taking centre stage as the Fed prepares to vote on a proposal that would ease capital requirements for the largest US banks. At the heart of the debate is the supplementary leverage ratio (SLR), a rule requiring banks to hold capital against all assets—regardless of risk—including relatively safe holdings like US Treasuries.
Originally implemented as a post-financial crisis safeguard, the SLR was designed as a backstop to ensure financial institutions remained resilient even when holding low-risk assets. However, bank executives argue that in its current form, the rule unnecessarily constrains their ability to facilitate trading in Treasury markets—particularly during times of economic stress. The proposed Federal Reserve leverage rule changes aim to address that.
Fed Chair Jerome Powell confirmed the central bank’s intent to revise the “enhanced” SLR (eSLR) formula, which imposes additional capital requirements on the nation’s largest and most systemically important banks. Speaking at a congressional hearing, Powell indicated the Fed is leaning toward a structure that aligns leverage requirements more closely with the actual risk posed by each institution.
This approach mirrors an earlier 2018 regulatory effort that failed to pass. The revised formula under the new Federal Reserve leverage rule changes would aim to restore the SLR’s role as a backstop rather than as a binding constraint, offering banks more flexibility. Alternative proposals are also under consideration, including a full exemption of Treasury securities from SLR calculations.
This regulatory shift comes under the guidance of Michelle Bowman, the Fed’s new Vice Chair for Supervision, appointed during the Trump administration. Bowman is expected to usher in broader deregulation in banking, starting with the Federal Reserve leverage rule changes. She has signaled her intent to overhaul what she describes as “distorted” capital requirements imposed after the 2008 crisis.
Future reforms may involve reducing the surcharge on globally significant banks and altering thresholds that trigger stricter regulations for growing institutions. Proponents argue these changes will free up capital, stimulate economic activity, and modernize outdated rules.
However, critics are warning that easing these safeguards could backfire. Senator Elizabeth Warren expressed concern in a letter to regulators. She warned that the proposed Federal Reserve leverage rule changes could encourage big banks to take on excessive debt, increase payouts to shareholders and executives, and heighten the risk of a future financial crisis.
Warren emphasized that these regulatory rollbacks serve industry interests at the potential expense of economic stability. Her message to the Fed was clear: prioritizing short-term gains over long-term security could expose the financial system to unnecessary risk.
As the Federal Reserve leverage rule changes move forward, the debate between economic growth and systemic safety continues. The coming months will reveal whether regulatory relief for banks can coexist with financial resilience—or if history is at risk of repeating itself.