How Slr Changes Affect Banks

Rethinking Capital Constraints: Leverage Ratios as a Strategic Input for GSIBs This article explores how the Leverage Ratio, Supplementary Leverage Ratio (SLR), and Enhanced SLR (eSLR)serve not just as compliance metrics, but as active constraints that shape capital efficiency and balance sheet strategy in Global Systemically Important Banks (GSIBs). Key Insights: =========== 1. Leverage Ratio caps asset growth relative to Tier 1 Capital, regardless of asset risk. 2. SLR and eSLR extend this by including off-balance sheet exposures like derivatives, SFTs, and guarantees—capturing a bank’s full footprint. 3. Thresholds: U.S. GSIBs face a 5% eSLR at the consolidated level and 6% at the insured depository level. Strategic Considerations: ====================== Business model mix—especially high-volume, low-risk exposures—can depress SLR despite strong RWA-based capital ratios. Optimizing SLR requires a holistic approach: netting, collateral efficiency, structuring, and capital allocation discipline. I nstitutions must balance intermediation capacity, regulatory buffers, and return on leverage exposure to scale sustainably. A case study of Apex Global Bank illustrates how structure—not just size—drives leverage outcomes, reinforcing the need for integrated capital planning. #CapitalManagement #CapitalOptimization #GSIB #SLR #eSLR  #LeverageRatio #Banking 

Large banks are pushing for the easing of the enhanced supplementary leverage ratio (eSLR), which would lower the amount of capital that they are required to hold against their assets. In the spirit of even-handedness, let's raise three concerns and three benefits of the contemplated roll-back: Concerns 1. Increased Risk of Financial Instability: Capital buffers were put in place to prevent a repeat of the 2008 financial crisis; and reducing capital requirements could make the banking system more vulnerable to shocks. Less capital means a smaller cushion to absorb losses, potentially leading to bank failures and the need for taxpayer-funded bailouts. If you doubt the concern, just recall the 2023 Silicon Valley Bank collapse. 2. Benefits Disproportionately Favor Large Banks and Shareholders: With freed-up capital, large banks would be able to pursue stock buybacks and pay dividends rather than increasing lending to Main Street. Yet again, the best-laid-plans might unintendedly concentrate risk in the largest, most interconnected banks. 3. Weakening of Post-Crisis Reforms: Rolling back parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act may morph into dismantling the Great Recession safeguards created to protect the economy. What we narrowly escaped in 2008 might come back with a vengeance. Benefits 1. Improved Market Liquidity: Easing the eSLR redresses the penalty banks arguably incur for holding low-risk assets like U.S. Treasury bonds. By easing these constraints, banks might be more willing to act as market makers, which could increase liquidity in the Treasury market, and, thus, make it easier for the U.S. government to finance its debt and further stabilize markets during times of stress. 2. Stimulation of Economic Growth: Lower capital requirements will give banks flexible lending capacity, which would stimulate economic activity through job creation and investment. 3. International Competitiveness: US Banks are saddled with more stringent capital requirements than non-US banks. Proponents of easing say that the outcome would better align U.S. regulations with global standards, making American banks more internationally competitive. Bill Singer's Conclusion: The current demand for regulatory change is an old back-and-forth. Too often we regulate "today" based upon "yesterday's" problems that we failed to anticipate. It's like driving forward while only looking in the rearview mirror. That's dangerous and often ends badly off the side of the road and overturned in a ditch.

At long last, federal regulators have put out their proposal to reform the supplementary leverage ratio with an eye toward improving Treasury market function. In an open meeting this afternoon, the Federal Reserve Board voted 5-2 to issue a proposal that would eliminate the 2% enhanced supplementary leverage ratio for the nation's eight largest banks and replace it with a new capital charge equal to one half of each bank's global systemically important bank, or GSIB, surcharge. The change would lower regulatory capital at the depository level by roughly 27%, but as the result of various other mechanisms, most of that capital would have to remain with their respective holding companies. This means the overall decline in aggregate capital would be about $13 billion, or 1.4%. Some see this as a middle ground solution, one less drastic than a full exemption of Treasury securities from the SLR calculation (something banks have been call for years) but sufficient enough to given them more capacity to facilitate U.S. debt trades. Others, including the Fed Govs. Barr and Kugler (the two no votes) say this capital break will not bring sufficient new intermediation. Instead, they argue, it increases the riskiness of each of the benefitting banks. For a full breakdown of the proposal, see my latest for American Banker. https://lnkd.in/esdcWrxX

Last week, the US federal banking regulators proposed changes to the enhanced supplementary leverage ratio (“eSLR”) requirement for US GSIBs. The proposal is intended to reduce the likelihood of the eSLR requirement being the binding capital constraint for US GSIBs and, thereby, enhance the ability of US GSIBs to hold low-risk assets. A key policy objective of the proposal is to bolster the resiliency of the US Treasury market. The US federal banking regulators also requested comments on exempting certain US Treasury securities from the supplementary leverage ratio (“SLR”) requirement that applies to US GSIBs and Category II and III banking organizations. https://lnkd.in/e7cUc57n Mayer Brown Jerry Marlatt Anna Pinedo Garrett Hawkins

SLR Easing: Let the Deregulation Begin The Fed recently released a proposal to ease the Supplementary Leverage Ratio (SLR) constraint for banks. The proposal varied from market expectations to exclude Treasuries and reserves at the Fed from the denominator of the SLR equation (similar to the post-COVID temporary relief). Instead, the Fed intends to set eSLR at half of the bank's GSIB surcharge. Subsidiary depository institutions will also now be subject to the same eSLR as their parent. If the proposed rule would have been in effect in Q1 2025, we estimate that the average minimum SLR for US GSIBs would have fallen from 5% to about 3.7%, ranging from 3.5-4.25%. These changes are likely to ease bank balance sheet constraints, lowering the cost of dealer intermediation of Treasuries. While not a panacea for declining intermediation given that high deficits will remain a worry, we expect the proposed changes to help at the margin. Full note for clients: https://lnkd.in/ekYHYu9s #trading #economy #deregulation #regulation #interestrates #treasuries #federalreserve #stocks #tdsecurities #tdstrategy