Federal Reserve Proposes Easing Bank Capital Rules to Boost Treasury Market Resilience

BATV News Report
June 25, 2025

In a move that could significantly reshape the U.S. financial regulatory landscape, the Federal Reserve has proposed a rollback of a key capital rule that large banks argue limits their capacity to hold U.S. Treasury securities and function effectively in the $29 trillion Treasury market.

The central bank’s Board of Governors voted 5-2 to recommend revising the Enhanced Supplementary Leverage Ratio (eSLR), a post-financial crisis safeguard intended to ensure large banks maintain a minimum level of capital. The proposed change would lower the capital threshold for major U.S. bank holding companies to a range of 3.5% to 4.5%, down from the current 5%. Similarly, their bank subsidiaries would see the requirement reduced from 6% to the same range.

Strengthening the Treasury Market

Federal Reserve Vice Chair for Supervision, Michelle Bowman, championed the proposal, stating that recalibrating the eSLR would “help to build resilience in U.S. Treasury markets” and decrease the likelihood of market dysfunction during periods of financial stress.

“We should be proactive in addressing the unintended consequences of bank regulation,” Bowman emphasized. Her comments come amid growing concerns that current capital requirements discourage banks from taking on low-risk assets like Treasuries during market turbulence—when their intermediary role is most needed.

A Divided Fed Board

Despite the backing of Fed Chair Jerome Powell, who told Congress that a binding leverage ratio could prevent banks from participating in “safe, low-margin activities” such as Treasury trading, not all Fed governors support the plan.

Former Vice Chair for Supervision Michael Barr and Governor Adriana Kugler both voted against the proposal. Barr warned that the changes could undermine financial stability by weakening the loss-absorbing capital buffers of globally significant banks. He estimated the revisions would reduce aggregate capital at the bank level by $210 billion—a figure he believes poses systemic risks.

“Taken together, these changes would significantly increase the risk that a G-SIB (Global Systemically Important Bank) would fail,” Barr cautioned.

Industry and Political Responses

Banks have long called for reform to the eSLR, particularly arguing for the exclusion of U.S. Treasuries from the calculation. While the proposal does not directly grant that carve-out, it invites public input on whether such an exclusion is appropriate. The Bank Policy Institute, a prominent industry group, welcomed the Fed’s openness to reconsidering the treatment of Treasuries.

“This is an important question that deserves thoughtful consideration,” said Greg Baer, the group’s president.

However, some lawmakers remain unconvinced. Senator Elizabeth Warren, a vocal advocate for stringent bank oversight, criticized the move, calling the leverage rule a “critical safeguard” for financial stability. She also warned of rising economic risks tied to legacy policies from the Trump administration, including tariffs and deregulation.

The Mechanics of the Proposal

The leverage ratio, enacted in 2018, serves as a non-risk-based capital measure—treating all assets equally regardless of their inherent risk. This makes it a backstop to more nuanced risk-weighted capital regulations. Critics argue that under current stress scenarios, the leverage ratio has become the dominant constraint, limiting banks’ ability to absorb safe assets like Treasuries.

According to Fed staff, the proposal would reduce capital requirements for the eight largest U.S. banks by $13 billion overall. However, while the rule eases capital constraints at the bank subsidiary level, it retains restrictions at the holding company level—preventing banks from using freed-up capital to increase dividends or buy back shares.

Notably, the changes would also reduce banks’ Total Loss Absorbing Capacity (TLAC) by 5% and long-term debt requirements by 16%, signaling a broader effort to relax regulatory burdens that critics say may impair market liquidity.

What Comes Next

The proposal now enters a 60-day public comment period, during which stakeholders across the financial industry and broader economy can weigh in. The Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) are also expected to review and possibly align their regulations accordingly.

The Fed had previously relaxed the leverage ratio during the COVID-19 crisis in 2020, allowing banks to temporarily exclude Treasuries and central bank deposits to support lending. That exemption expired in March 2021, prompting renewed calls from the banking industry for a permanent solution.

Looking ahead, Bowman underscored the uncertainty of future market disruptions. “We do not know exactly what circumstances may lead to a future stress event,” she said, “but we do know that these events have raised concerns about the resilience of U.S. Treasury markets.”

As the debate unfolds, regulators face a delicate balancing act: preserving the flexibility needed for banks to support critical markets while maintaining the capital safeguards that protect the broader financial system.

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