The Federal Reserve is preparing to loosen the leash on America’s biggest banks. On June 25, the Fed will meet to finalize a proposal that would lower the enhanced supplementary leverage ratio, or eSLR, by up to 1.5 percentage points. This rule, which currently requires bank holding companies to maintain a 5% capital buffer and their subsidiaries to hold 6%, is about to be trimmed to a range between 3.5% and 4.5%. The change targets JPMorgan, Goldman Sachs, Morgan Stanley, and the rest of the too-big-to-fail club. The timing is not accidental.
The $29 trillion Treasury market has been flashing red. Liquidity is thin. Yields are volatile. Demand at recent auctions has been weak. The Fed and Treasury are watching the bond market wobble under the weight of rising rates and ballooning deficits. The banks say the eSLR is the problem. It forces them to hold capital against Treasuries the same way they would against junk assets. That makes it expensive to step in when the market needs buyers. The regulators are listening.
The industry has been here before. In 2020, during the COVID panic, the Fed temporarily suspended the SLR’s application to Treasuries. Banks didn’t flood the market with support. They hoarded capital. They paid dividends. They bought back shares. The suspension expired. The rule came back. Now it’s being rewritten again. The lesson from 2008 didn’t stick.
Fed Chair Jerome Powell told Congress in February that he’s been “somewhat concerned about the levels of liquidity in the Treasury market” for a long time. The new proposal doesn’t exclude Treasuries from the ratio. It just lowers the bar across the board. Regulators say they’ll ask for public comment on whether to carve out Treasuries later. For now, the banks get more room to lever up. That’s the play.
The move mirrors a 2018 rollback under President Trump’s regulators. The language is nearly identical. The goal is to make it easier for banks to act as intermediaries in the Treasury market. But the risk is clear. Lower capital requirements mean higher leverage. Higher leverage means more exposure. If the bond market cracks, the banks will be holding the bag. Again.
The Fed, FDIC, and OCC have declined to comment. The proposal is still being finalized. But the direction is set. The capital cushion is shrinking. The banks are getting more rope. What they do with it is anyone’s guess. The regulators are betting the system can handle it.
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