The federal bank regulatory agencies have issued a request for public comment on a proposal aimed at modifying certain regulatory capital standards. The goal is to reduce disincentives for banking organizations to participate in lower-risk activities and ensure the smooth operation of U.S. Treasury markets.
Currently, banking organizations are subject to both risk-based and leverage capital requirements. Risk-based requirements vary depending on the risk level of individual exposures, assigning lower capital requirements to less risky assets like Treasury securities compared to higher-risk corporate bonds. Leverage capital requirements, however, apply uniformly across all exposures. A higher leverage requirement can discourage banks from engaging in low-risk activities such as intermediation in U.S. Treasury markets.
The proposed changes would adjust leverage capital standards for the largest and most systemically important banking organizations. These standards would act as a backstop to risk-based requirements without discouraging participation in low-risk activities. Specifically, the proposal suggests setting the enhanced supplementary leverage ratio based on a banking organization’s overall systemic risk for both bank holding companies and their depository institution subsidiaries.
According to the agencies, the total amount of capital that banking organizations maintain is expected to remain largely unchanged due to this proposal. Overall, tier 1 capital standards for affected bank holding companies would decrease by less than two percent. Some depository institution subsidiaries might experience greater reductions; however, restrictions at the bank holding company level would prevent this capital from being distributed externally.
Additionally, conforming changes would be made to other regulations linked to the enhanced supplementary leverage ratio, including total loss-absorbing capacity and long-term debt requirements.
Public comments on this proposal are invited until August 26, 2025.
