eSLR Proposal is Important Step to Rationalize Capital Framework

Washington, D.C. - The banking agencies' proposal to recalibrate the enhanced supplementary leverage ratio is a prudent move to restore the eSLR to its intended purpose and support Treasury market vitality, BPI said in a comment letter today. Reforms to the eSLR are one piece of a more comprehensive capital overhaul that is necessary, the letter said.

"This proposal marks progress toward a more data-driven approach to capital requirements, which will benefit economic growth. The eSLR should be a backstop, not a binding constraint, and this proposal would help restore that crucial balance. But the eSLR is only one part of the bigger picture, which includes necessary reforms to stress testing, the Basel III Endgame proposal, the GSIB surcharge and the tier 1 leverage ratio. We are encouraged by Vice Chair Bowman's stated goals of considering the cumulative effects of regulatory requirements and questioning if regulations are fulfilling their purpose." - Sarah Flowers, BPI Head of Capital Advocacy

Out of Balance. The eSLR has deviated from its intended purpose as a backstop to risk-based capital requirements, and it increasingly serves as a binding constraint.

• The eSLR represented the binding tier 1 capital requirement 60% of the time, on average, for seven of eight U.S. GSIBs and 87% of the time, on average, for the depository institution subsidiaries of GSIBs.
• The eSLR can discourage banks from intermediating in U.S. Treasury markets. Research by Federal Reserve economists demonstrates that large banks bound by the eSLR or SLR are less willing to increase U.S. Treasury holdings compared to less constrained primary dealers. (Learn more here and here.) This dynamic makes markets less liquid under stress.

Broader Reforms Needed. The eSLR is a welcome step in reforming the capital framework, but more changes are necessary in both risk-based and leverage capital requirements.

• The tier 1 leverage ratio should be revised so that all leverage ratio requirements generally serve as a backstop to risk-based requirements. This ratio currently disincentivizes low-risk activities in a way similar to the eSLR.
• Reforms to the GSIB surcharge, stress testing and finalization of the Basel III standards are also needed.

To learn more, access the letter here.

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