Federal Reserve unveils major cut to capital buffer for big US banks
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The news: The Federal Reserve has unveiled a long-anticipated proposal to slash the enhanced supplementary leverage ratio (eSLR), marking one of the biggest reductions of US bank capital requirements since the 2008 financial crisis.
The numbers: The plan will lower the required capital ratio for the largest bank holding companies from 5% to a range of 3.5% to 4.5%, and for their depository institution subsidiaries from 6% to the same range.
The context: The eSLR was introduced after the 2008 financial crisis as a backstop to other risk-weighted capital rules. But banks have been lobbying regulators, arguing the rule discourages holding low-risk assets like Treasuries, especially during market stress.
The changes also come amid a broader deregulation push under the Trump administration.
The proposal was unveiled on the same day as Fed Chair Jerome Powell faced the Senate Banking Committee, where he said it was “prudent” to reconsider the rule.
At the hearing, Powell warned that while tariffs might cause a one-off price jump, there is a risk they could lead to “more persistent inflation,” explaining the Fed must “manage that risk” by holding off on rate cuts for now.
That came amid ongoing criticism from US President Donald Trump, who on Wednesday (Thursday AEST) said he thought Powell, whose term as chair runs until May 2026, “is terrible” and said he had “three or four” people in mind to replace him.
What they said: Fed Vice Chair for Supervision Michelle Bowman said the proposal “will help to build resilience in US Treasury markets, reducing the likelihood of market dysfunction and the need for the Federal Reserve to intervene in a future stress event.”
Critics, including Senator Elizabeth Warren and Fed Governors Michael Barr and Adriana Kugler, warned the move could increase the risk of financial instability. The proposal is now open for a 60-day public comment period.
The Fed says the changes won’t materially reduce total capital as other rules remain binding.
The sources: Senate Banking Committee, US Federal Reserve, Comptroller of the Currency, Reuters
