The federal bank regulatory agencies have announced a proposal seeking public comment on changes to certain regulatory capital standards. The goal is to minimize disincentives for banking organizations engaging in lower-risk activities and ensure the smooth operation of U.S. Treasury markets.

Banking organizations currently face both risk-based and leverage capital requirements. Risk-based requirements differ according to the risks of individual exposures, assigning lower capital demands on low-risk assets like Treasury securities compared to higher-risk corporate bonds. In contrast, leverage capital requirements apply uniformly across all exposures, potentially discouraging low-risk activities such as U.S. Treasury market intermediation when they are set higher than risk-based requirements.

The proposed changes target leverage capital standards for the largest and most systemically important banking organizations. The modifications aim to align these standards as a backstop to risk-based requirements, ensuring they do not deter engagement in low-risk activities. Specifically, the enhanced supplementary leverage ratio would be adjusted based on an organization's overall systemic risk.

Agencies predict that the overall capital levels maintained by banking organizations will remain largely unchanged due to this proposal. Overall tier 1 capital standards for affected bank holding companies are expected to decrease by less than two percent in aggregate. While some depository institution subsidiaries might experience more significant reductions, existing restrictions at the bank holding company level would limit any external shareholder distribution of this capital.

Additionally, conforming amendments would be made to other regulations linked with the enhanced supplementary leverage ratio, including total loss-absorbing capacity and long-term debt obligations.

Statements from Chair Powell, Vice Chair for Supervision Bowman, Governor Barr, Governor Kugler, and Governor Waller accompany this announcement.