Federal Reserve Board – Agencies request comment on proposal to modify certain regulatory capital standards

The federal bank regulatory agencies today requested comment on a proposal to modify certain regulatory capital standards to reduce disincentives for banking organizations to engage in lower-risk activities and promote the smooth functioning of U.S. Treasury markets.

Banking organizations are subject to both risk-based and leverage capital requirements. Risk-based capital requirements vary based on the risks of individual exposures, imposing lower capital requirements, for example, on a Treasury security with lower risk than on a corporate bond with higher risk. Leverage capital requirements, by design, treat all exposures equally. A leverage capital requirement that is generally higher than risk-based capital requirements can discourage banking organizations from engaging in low-risk activities, such as U.S. Treasury market intermediation.

The proposal would modify certain leverage capital standards applicable to the largest and most systemically important banking organizations so that they serve as a backstop to risk-based capital requirements and do not discourage these banking organizations from engaging in low-risk activities. In particular, the proposal would set the enhanced supplementary leverage ratio for both bank holding companies and their depository institution subsidiaries so that it is based on a banking organization's overall systemic risk.

The agencies anticipate that the amount of overall capital that banking organizations maintain would generally stay the same as a result of this proposal. In aggregate, the proposal would reduce tier 1 capital standards for affected bank holding companies by less than two percent. Although certain depository institution subsidiaries could see greater reductions, that capital generally would not be available for distribution to external shareholders given the restrictions that apply at the bank holding company level.

The proposal would also make conforming changes to other regulations that are tied to the enhanced supplementary leverage ratio, such as total loss-absorbing capacity and long-term debt requirements.

Comments on the proposal are due by August 25, 2025.