- US regulators finalized a rule reducing capital requirements tied to Treasury holdings for major banks, lowering the enhanced supplementary leverage ratio (eSLR) buffer to 1%.
- The change is designed to free up bank balance sheets, encouraging more purchases of long-term Treasurys like the 10-year note, and potentially lowering borrowing costs across the economy.
- Critics, including Fed Governors Lisa Cook and Michael Barr, warned the rollback could weaken the financial system’s ability to absorb future shocks by cutting bank capital reserves by $219B.
Capital Rule Rework
In a significant shift, US regulators—including the Federal Reserve, FDIC, and OCC—have eased capital rules for the nation’s largest banks. The new rule reduces the eSLR buffer to 1%, capping the total leverage requirement at 4%, per Globe St.
This change affects only the largest institutions, which are considered systemically important. The adjustment aims to align capital requirements more closely with the actual risk of holding US Treasurys.
The Rationale
Regulators argue that Treasurys are low-risk assets and should not carry the same capital burden as riskier holdings. The move reflects a broader regulatory rollback, backed by the Trump administration, that seeks to boost demand for long-term government debt.
Supporters say the new rule will encourage banks to purchase more 10-year Treasury notes. That demand could lift bond prices and lower yields. In turn, this would ease the government’s debt-service costs and put downward pressure on mortgage and other long-term borrowing rates.
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Market and Industry Response
Large banks have long pushed for this type of regulatory relief. By lowering the amount of capital tied up in Treasurys, the rule frees up funds for lending or other investments.
Fed Governor Stephen Miran supported the rule. He argued the leverage ratio should not be the main limit on banks’ balance sheets in normal times. Miran added that overly strict leverage rules could lead to more risk-taking, not less.
At the same time, he noted a missed opportunity. He said regulators should have gone further and excluded Treasurys and central bank reserves from leverage calculations altogether, a view that has gained attention as market observers examine the long-term effects of recent regulatory moves on 10-year Treasury demand.
Dissenting Opinions
Not all regulators agreed with the change.
Fed Governor Lisa Cook dissented, saying she wanted a recalibration that maintained capital strength while avoiding penalties for low-risk activity. However, she could not support a rule that so significantly reduced capital at key subsidiaries of major banks.
Michael Barr, the Fed’s Vice Chair for Supervision, also voted against the rule. He said the change weakens the eSLR as a safeguard. He also warned it cuts capital requirements by $219B across the largest global banks. Barr expressed doubt that the rule would meaningfully improve the Treasury market’s resilience.
Why It Matters
This rule change is a major win for Wall Street. It also signals a larger effort to ease post-crisis regulations, especially those from Dodd-Frank.
Branded as a technical fix, the move could have broad effects. Lowering capital requirements on Treasurys may boost liquidity in the bond market. It could also reduce the government’s borrowing costs at a time when federal debt levels are rising.
However, critics argue that less capital at big banks could make the system more fragile in future downturns.
What’s Next
With the rule now in effect, regulators and markets will watch how banks respond. A sharp increase in Treasury purchases could support bond prices and ease yields, as intended.
Still, debate continues over how to balance financial stability with market efficiency. The question of how much capital banks should hold—especially when dealing with “safe” assets like Treasurys—remains unsettled.
